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Why Is Legal Weed So Expensive? Low Supply, High Demand And Big Tax Driving Chicago’s Pricey Pot

Officials say prices will come down when supply catches up to demand. But for now, some buyers are treating legal weed like a special bottle of whiskey.

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CHICAGO — On Saturday, Ivano Ipsaro Passione braved the snow to wait in a long line at NuMed dispensary in Bucktown, picking up a peanut butter edible bar and a vape cartridge for $78.

But there’s something else Passione picked up he wasn’t planning for: a hefty $26.37 tax on his bill. Like other dispensaries, NuMed doesn’t itemize the various taxes consumers pay, making them confusing to compute.

Illinois’ steep weed taxes, combined with already high cannabis prices tied to a dwindling initial supply, has some people keeping their street dealer on speed dial.

But dispensary owners, market analysts and legislators who crafted the state’s weed bill all are urging patience, saying the prices will come down.

Dispensaries have asked customers to check social media to learn whether their favorite shop has enough legal weed to sell before stopping in. Outsized demand, limited supply, high taxes and Illinois’ quick on-ramp from a small medical market to full legalization are contributing to the high price.

Illinois’ legal weed prices are higher than any other state across all products, said Andy Seeger, cannabis research manager at the Brightfield Group. The sticker shock of Illinois’ legal weed will allow street dealers to stay in business, he said.

“This should drive some people back to their weed man. There will always be a black market and we’ve seen this in other places with governments that need to fine tune their tax structures,” he said.

Part of the issue is that Illinois wasn’t fully developed as a medical marijuana market before recreational cannabis was rolled out, Seeger said. Where patients in other states could get a medical card for anxiety or insomnia, the list of conditions to qualify for a medical marijuana in Illinois was much shorter — leading to less available supply in the state. Expansions have been made to the state’s medical marijuana program since then.

“We’re kind of stuck in this situation where there is a product shortage. We’re caught in the middle of December in Illinois, trying to grow enough product for a very large amount of demand,” he said.

Kris Krane, president of dispensary Mission South Shore, 8554 S. Commercial Ave., said cultivators in the state were hesitant to invest in and expand their facilities because there was uncertainty that legal pot would pass.

“These cultivators that built out their cultivation infrastructure to meet the demands of the medical market … very few started expanding their cultivation facilities before the law passed,” he said.

Currently there are fewer than two dozen cultivators in the state. Expanding their facilities to meet the legal demand could take many months and millions of dollars. In the meantime, cultivators have all of the bargaining power to set wholesale prices.

“You’re just not going to see a huge change in those retail prices until those wholesale prices start coming down,” Krane said. “Right now wholesale prices here are as high as anywhere I’ve seen in the country.”

But Seeger predicts the high prices won’t stick around.

“Hopefully in the coming months, we’ll see a little bit of a reduction in shortage as well as a reduction in price,” he said. “By the end of the year, we should absolutely see a reduction in price.”

Customers have bought up more than $19 million in weed products since weed went legal, according state sales figures released Jan. 13.

Kris Krane, president of Mission South Shore. Justin Laurence/ Block Club Chicago

‘Growing Pains’

Budzu, a website popular with weed consumers, allows people to anonymously enter the price they pay for pot, legal or off the street. The crowdsourced site puts the street price of an eighth in Chicago at $40 for “medium” quality weed and $70 for a similar quality at a dispensary, although there has been less time to collect data on dispensary sales. Popular flower products are $60 before tax, according to a few dispensary websites in Chicago.

In Washington and Colorado, which began selling recreationally in 2014, an eighth of weed costs considerably less — $28 at the dispensary and $21 on the street in Washington. In Colorado, it’s $31 at a dispensary and $26 on the street, according to the website.

Seeger said those prices track with what he’s seen.

“Right now we’re more than double other states that I’ve seen and, you know, some states are incredibly cheap, but the average of what I’ve seen we’re roughly double that,” he said.

At NuMed, one customer named Kyle said he’ll shop at dispensaries for edibles and other products, but he’s hesitant to buy flower there.

“It’s kind of dope that you can choose the feeling that you want, and for that I think I’d pay an extra price. I don’t know what the price is for flower right now, but I’ve heard some outrageous prices and if it’s gonna be as outrageous as $75 for an eighth [including taxes], I don’t know if I’d shell out that much,” he said. “…If you’re to get it on the street out here, it’s usually like $50-$60 bucks.”

Flower sales account for 50-60 percent of all legal weed sales, said Seeger and Krane. Krane said flower is what initially brings a lot of customers in the door because it’s what customers are most familiar with.

Once the price of legal weed — a price that includes taxes — is comparable to the street market, “that’s when I think we’ll see a real massive movement of consumers from the illicit market to the legal,” Krane said.

“I think when it gets to about $50ish [for an 1/8th ounce of flower] all in that will probably have a significant impact,” he said.

State Rep. Kelly Cassidy (D-Chicago) said high prices were expected.

“We know that it takes about five years to get to market maturity,” she said. “When we talk about the market maturing, that’s people habituating into the legal market as opposed to the street market, but that’s also supply issues leveling out, that’s producers and retailers …getting into a groove. That’s what we’re watching play out now, is those growing pains.”

Inside Mission South Shore. Justin Laurence/ Block Club Chicago

A Complex Tax System

When Chicagoans buy legal pot, they are hit with hefty taxes that can be difficult to understand.

Legal weed is taxed based on its level of potency, measured by THC in the product. Products with THC level at or below 35 percent are subject to a 10 percent tax. Products with a THC level above 35 percent are taxed at 25 percent. All cannabis infused products, like edibles, are taxed at 20 percent.

Those rates are in addition to local and state sales taxes, which is a combined 10.25 percent in Chicago. And in July, an additional cannabis tax of 3 percent will take effect in Chicago. Cook County could also tack on another 3 percent tax, as the proposed county tax is currently being considered by the Board of Commissioners.

So, customers who buy a high THC product from a Chicago dispensary right now are hit with a 35.25 percent tax. In July, that tax could soar to 41.25 percent.

When a weed grower sells to a dispensary, that transaction is also taxed at 7 percent, meaning the increased cost could also be passed through to dispensary customers.

Lucy Dadayan, senior research associate at the Urban Institute, said Illinois taxes weed in a unique way. Most states with legal weed tax products based on price or weight, while Illinois taxes based on level of THC.

State Sen. Heather Steans (D-Chicago) said whether high taxes are motivating people to buy from their street dealer instead of a license dispensary will be studied.

“This is going to be a program that’s continuing to be evaluated as to what tweaks and changes we need to make to it,” she said.

Cassidy also said the tax structure will be monitored.

“Whether we have to go back and reduce [taxes] or if this levels off as prices go down,” will be looked at, Cassidy said.

Tax structures and rates vary in the eleven states that have a recreational cannabis program. Dadayan’s October 2019 study notes that taxes often change after a state’s marijuana market first opens.

When Washington first began taxing sales in 2014, the state had a complex, tiered structure similar to Illinois. A year into the program, Washington scrapped that for a simpler, 37 percent retail excise tax at dispensaries.

Oregon voters also approved a complex tax system, but before sales began, lawmakers replaced the structure with a 17 percent retail excise tax. Local municipalities may also impose up to a 3 percent tax on purchases, according to the study.

Dadayan said many people point to Colorado as a model for taxation, but she stressed there’s no perfect example. Colorado’s legal weed is exempt from its general sales tax and is subject to a 15 percent retail sales tax.

In Michigan, taxes are also low by comparison — a 10 percent excise tax and 6 percent state sales tax.

Krane, who’s Mission South Shore location could compete with Michigan for northern Indiana customers, said Michigan is having issues with their legal roll out as well.

“Michigan is having its own problems. Michigan has a flower crisis right now,” said Krane, whose 4Front owns a stake in an Ann Arbor dispensary. “…Sales numbers in Michigan are way lower than you would expect because flower drives sales.”

The line at Mission South Shore dispensary on New Year’s Day. Justin Laurence/ Block Club Chicago

Where do the taxes go?

Chicago does not have a dedicated fund for its tax revenue. Paul Stewart, Mayor Lori Lightfoot’s cannabis advisor, told City Council the city’s take could range from $3.5-10 million in Year One.

The state will divide cannabis tax revenue into a number of different pots:

  • 35 percent goes to the General Revenue Fund
  • 25 percent to the Restoring Our Communities Fund for community reinvestment departments
  • 20 percent to a fund that will support mental health and substance abuse services
  • 10 percent to the Budget Stabilization Fund to pay a backlog of unpaid bills
  • 8 percent to the Illinois Law Enforcement Training and Standards Board to create a law enforcement grant program
  • 2 percent to the Drug Treatment Fund to fund public education and awareness

The Illinois Department of Revenue projects the state will raise more than $57 million in revenue and licensing fees in the first year of sales. As the market matures, it projects the state could collect $375 million in 2024. A fully mature market could produce between $440 million and $657 million in tax revenue for the state annually, according to a study commissioned by the sponsor of the state’s legal weed bill.

But revenue projections don’t always materialize, Dadayan said. As more states legalize weed, states like Illinois will lose out on potential tax dollars from weed tourism.

“You have to consider that more states are going to enter into the market, so things are going to change. I think the revenue projections are always quite optimistic,” she said.

A line outside NuMed. Justin Laurence/ Block Club Chicago

‘A Big Tax, Man’

As buyers wait for supply to catch up to demand, the market to mature, or for taxes to be reduced, some have come up with a compromise.

Edward Burns has been to Dispensary 33 twice since recreational sales began. He said he and his girlfriend spent about $350 on products on New Year’s Day. He didn’t know exactly what he paid in taxes that day, but said “yeah, that was a big tax, man.”

Despite the high price, he went back again on Wednesday.

“I just got an eighth of ‘superglue’ which costs $80 with taxes. I spent $80 on an eighth when I usually spend $40 on a quarter, but the stuff is a lot better. It is much, much better, like world’s better,” he said.

Going forward, he said he’d treat dispensaries as a luxury item.

“It just depends if you have the money, if you want to celebrate. It will be, it’s more of like when you get an expensive bottle of whiskey for the holidays versus when you get a bottle of Jack, or whatever,” he said.

Saturday at NuMed, Joey Moreno, a barista living in Lakeview, said the Bucktown dispensary was the second one he’s been to since recreational weed sales began. He said he likes the dispensary experience because he “likes a trustworthy product,” but he said at the moment legal weed comes with a luxurious price, so he’ll treat it as a luxury item.

“To me it’s gonna be like one of those little gluttonous things that, you know, if I have a little extra money in my pocket that week I’ll stop in the store and pick up some stuff,” he said.
Moreno doesn’t know if he’ll fully transition to buying on the legal market.

Buying from his weed dealer is cheaper and more convenient, after all.

“You know, most people have been buying from their third floor walk-up neighbor … and they’ve been hooking them up for years,” he said. “So of course those people, probably myself included (aren’t) going to give up on that.”

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Why Is Legal Weed So Expensive? Low Supply, High Demand And Big Tax Driving Chicago’s Pricey Pot Officials say prices will come down when supply catches up to demand. But for now, some buyers are