How high taxes support black markets
Some state governments – like California – are puzzled to find that a black market for marijuana still flourishes despite legalization. The problem isn’t legalization – it’s the sky-high taxes California slaps on weed that keep the black markets alive and thriving.
San Francisco is trying to do something about it. And for once, the city by the bay is doing it right:
An ordinance suspending San Francisco’s Cannabis Business Tax was unanimously approved by city supervisors Tuesday.
San Francisco Supervisor Rafael Mandelman, the ordinance’s author, said in a statement suspending the business tax on cannabis will help support legal cannabis retailers as they struggle to compete with illegal cannabis sellers.
The local tax will be suspended for a year – a good start, and one that gives hope that other governments will see how punitive taxation props-up crime.
Take another example – cigarette taxes and cigarette smuggling. As the Tax Foundation notes:
Excessive tax rates on cigarettes in some states induce substantial black and gray market movement of tobacco products into high-tax states from low-tax states or foreign sources.
New York has the highest inbound smuggling activity, with an estimated 52.2 percent of cigarettes consumed in the state deriving from smuggled sources in 2019. New York is followed by California (43.4 percent of consumption smuggled), Washington (42.6 percent), New Mexico (37.2 percent), and Minnesota (35.2 percent).
New Hampshire has the highest level of outbound smuggling at 71.3 percent of consumption, likely due to its relatively low tax rates and proximity to high-tax states in the northeastern United States. Following New Hampshire is Idaho (29 percent outbound smuggling), Virginia (29 percent), Wyoming (23.1 percent), and North Dakota (18.3 percent).
Oklahoma, following a cigarette tax increase from $1.03 to $2.03 in the Summer of 2018, has seen a significant increase in smuggling into the state, moving it from a ranking of 30th to 17th highest inflow of cigarettes in the U.S.
Even governments get greedy. And when they do, black markets follow.