Inflated taxes on legal marijuana in California could present the opportunity to turn many consumers away from the state’s cannabis dispensaries and lead them back toward the black market.

The credit rating agency predicts that state and local taxes on cannabis, which will become legal in California on Jan. 1., could be as high as 45 percent in some circumstances. It would trail only Washington state, which levies a 50 percent tax on marijuana.

“The existing black market for cannabis may prove a formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources,” the report says.

Recreational marijuana will be taxed on both the state and local level, adding to the potential for high rates. California will require a 15 percent excise tax, as well as cultivation taxes. Municipalities will also levy sales tax and a business tax, which could be anywhere from 1 to 20 percent, on gross receipts. Business taxes on recreational marijuana have been approved by voters in 61 California cities and counties, according to the report.

These high tax rates have the potential to drive customers toward the black market. The state is the nation’s epicenter of marijuana growing and has long provided black market pot. The report states that Colorado, Oregon, and Washington all reduced tax rates after the commencement of legalization to shift customers back toward the legal market.

California will implement a statewide framework for marijuana legalization, but each municipality must decide whether it wants to house marijuana businesses and if so, map out its own regulations and tax structure. This may lead to a playing field that is not level in terms of tax revenue. Some cities like Adelanto, about 85 miles northeast of Los Angeles, are using the cultivation of marijuana as an economic development strategy. In Monterey County in northern California, the local government is encouraging cannabis growers to use its vacant greenhouses.

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