California Pot Industry Tax Cut: Too Little, Too Late?

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FILE – A grower from Loving Kindness Farms tends to a harvest of young marijuana plants on December 28, 2018 in Gardena, California. California Gov. Gavin Newsom is set to propose a temporary tax cut for California’s marijuana industry, but companies say it falls short of what’s needed to revive the shaky pot economy. Widespread legal sales began in California in 2018, but the industry has struggled with high taxes, regulations, and competition from a huge illegal market. The administration will recommend the abolition of the cultivation tax. But a later cannabis excise tax hike would come to offset those funds, possibly as early as 2024. (AP Photo/Richard Vogel, file)

AP

California’s governor on Friday proposed a temporary tax cut for the state‘s struggling legal marijuana industry, but companies said it’s nowhere near enough to revive a failing cannabis economy.

Widespread legal sales began in California in 2018, but the industry has been weighed down by high taxes that can reach as high as 50% in some areas, costly regulation, and competition from a thriving illicit market that industry analysts estimate is at least twice its size the legal one.

Meanwhile, a deluge of cannabis from enterprise-scale farms has sent wholesale prices tumbling, leaving some growers unable to turn a profit.

California was once envisioned as a national model for legal sales, but industry leaders warned Democratic Gov. Gavin Newsom in December that the state’s licensed industry was on the verge of collapse and needed immediate tax breaks and rapid retail expansion to survive.

In a proposal to the Legislature for the fiscal year beginning in July, the Newsom administration recommended eliminating the much-despised grow tax, which is set at $161 per pound of bud. But to make up for those lost funds, after three years the state would increase the excise tax on retail cannabis purchases to 19% from the current 15%.

But a consumption tax jump could come sooner.

If the state doesn’t collect enough cannabis tax dollars to support a range of education, law enforcement, and other programs — totaling $670 million a year — the use tax could be increased to fill that gap as early as January 2024, when not necessarily at the level of 19%. In addition, the state is providing a one-time cash flow of US$150 million to cover these costs.

The tax debate poses a thorny political challenge for Newsom, who is seeking a second four-year term in November. He’s being pressured by struggling corporations who want deep tax cuts, but youth and other organizations that benefit from those dollars don’t want those funds to dry up.

Other provisions in Newsom’s plan include approximately $20 million in grants to communities to expedite retail store licensing. While cannabis is legal in California, many communities have either banned it or have not established local licensing programs to operate the markets. There are fewer than 1,000 retail outlets, down from about 8,000 before broad legalization began, companies say.

Overall, the governor’s proposed changes “would greatly simplify tax compliance, reduce the overall tax burden on our licensees and help stabilize the legal market,” said Nicole Elliott, director of the state Department of Cannabis Control.

If approved, the plan would represent the first change in tax policy since the legal sale began. However, some taxes, including cultivation, have increased during this period.

The plan disappointed leading companies who had sought to eliminate the cultivation tax and reduce the excise tax on retail sales from 15% to 5%, among other changes.

Jerred Kiloh of the United Cannabis Business Association, a Los Angeles-based trade group, said the plan would not allow companies to slash high consumer prices, which have driven buyers to the underground market, where no taxes are collected and prices are cheaper are.

And it’s even possible that the plan could result in higher costs for consumers at the point of sale, Kiloh warned.

“All they’re really doing is shifting some taxes and it’s never going to get to the customer,” added Kiloh.

Cannabis is subject to a number of state taxes and can also be taxed at the local level. Currently, state taxes include a cultivation tax on bud, foliage and plants, the 15 percent excise tax on retail sales, and the usual sales tax.

Lindsay Robinson of the California Cannabis Industry Association viewed the plan as a first step that wasn’t enough to crack down on illegal sales. “It kicks the can down the road,” she said.

There will be no quick fix. Speaking to reporters in Sacramento, Newsom said the proposal marks “the beginning of a process” to force illegal operators to pull out that would take years.

The proposal will be reviewed in the legislature, where it could be amended.

Cannabis remains illegal at the federal level, although most Americans live in states that have at least some access to legal legal marijuana.

It’s difficult to compare the tax burden on marijuana from state to state because of the many different approaches used and some states restricting sales to medical marijuana only. Washington state has an excise tax of 37% on general legal sales. When New York paved the way for widespread legal sales last year — a process still ongoing — the levies included a tax based on THC content, the active ingredient in marijuana.

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