By Beau Whitney, Chief Economist at Whitney Economics.
- We begin with the assumption that an increase In US corporate tax rates, from 21% to 28%, is coming.
- Because of a relatively obscure IRS regulation known as 280E, this increase in federal tax rates would push effective tax rates for cannabis operators to more than 70%.
- Without reform of 280E, forced consolidation will be one unintended consequence that hurts smaller, minority-owned and women-owned cannabis retailers.
- This is a watershed moment for the US cannabis industry.
A Corporate Tax Increase Is Coming
Raising taxes in the middle of a pandemic-induced recession is obviously not a straightforward task. If tax increases are focused too narrowly, they will not achieve their revenue objectives. However, if tax increases are not focused enough, they can have significantly negative impacts that result in unintended outcomes. The proposed corporate tax increase coming from Washington D.C. will negatively impact the cannabis industry, which has earned a good reputation for generating tax revenue and creating jobs.
Because Of An Obscure IRS Tax Code, This Corporate Tax Increase Will Damage Smaller Cannabis Operators
Although cannabis is medically legal in 37 states, with 15 of these states also allowing sales for adult-use purposes, it is still a schedule 1 drug. It is deemed illegal by the federal government. Despite the nation’s strong embrace of cannabis at the state level, cannabis retailers are subjected to a punitive federal business tax called IRC 280E. Our analysis indicates that the proposed corporate tax increases (from 21% to 28%) would increase business taxes on cannabis operators by $6.8 billion over 5 years. This amount is estimated to add an additional $140,000 in federal tax payments, per cannabis retailer, per year for the same time period. By adding an additional $140,000 in federal taxes, cannabis operators face the daunting task of spending nearly two full months-worth of revenue just …