California Gov. Gavin Newsom’s new budget priorities include a proposal to eliminate the state’s cannabis cultivation tax, offering licensed marijuana growers relief from high costs that insiders say are threatening the viability of the regulated pot industry. Newsom unveiled his budget for the 2022-2023 fiscal year on Friday, showing a record surplus of nearly $100 billion for the state’s coffers.
According to the proposed budget, Newsom will ask the state legislature to eliminate the cultivation tax that cannabis growers are required to pay, usually before their crop has even been sold. Under the current tax structure, cultivators are assessed a tax of $10.08 for every ounce of dried cannabis flower they produce.
Newsom’s proposal would amend the recreational marijuana legalization ballot measure approved by California voters in 2016, which means eliminating the cultivation tax must be approved by a two-thirds majority of the state legislature. The governor’s office has been working with lawmakers to help garner support for the change.
“We’ve been working very closely with legislative leaders, and we’ve made tremendous progress,” Newsom said at a Friday briefing, as quoted by Marijuana Moment. “We haven’t finalized any of that, so I want to be careful not to disrupt that progress.”
Taxes And More Taxes
Currently, legal cannabis in California is taxed at four different layers of the regulated supply chain. Besides the cultivation tax, a state and local excise tax paid by licensed marijuana distributors and state and local sales tax paid by customers at the point of sale are also assessed. The heavy tax burden has led many producers to maintain that that the viability of their businesses are threatened by illicit producers whose failure to pay taxes gives them a competitive advantage over licensed businesses.
In the fourth quarter of 2021, California reported more than $308 million in cannabis tax revenue, including just under $39 million in cultivation taxes. The excise tax on cannabis generated more than $157 million in revenue, according to the California Department of Tax and Fee Administration. All told, the state has collected more than $3.4 billion in additional taxes since licensed sales of recreational marijuana began in January 2018.
In a letter sent to Newsom last week, representatives of the regulated cannabis industry wrote that the taxes and other expenses licensed operators pay have forced some growers out of business. The letter, signed by licensed businesses including Flow Cannabis Co., Glass House Brands and Kiva, called on Newsom to permanently suspend the cultivation tax and reduce the excise tax rate to 5% and to eliminate the tax for social equity businesses.
“Failure to appropriately reform the industry’s tax structure will create an avalanche of adverse consequences,” reads the letter from cannabis producers quoted by the Sacramento Bee. “These losses will include the elimination of thousands of union jobs as businesses close, leaving working class people unemployed; the shuttering of social equity businesses; the continued risk of consumers accessing untested, contaminated products; the proliferation of dangerous cartels; and the lost opportunity to use cannabis tax revenues to subsidize critical services like childcare vouchers, programs for the working poor, and youth harm reduction.”
Study Finds Nixing Cultivation Tax Will Boost Revenue
Advocates argue that eliminating the cultivation tax would actually increase the cannabis revenue collected by the state. An analysis of the impact of cannabis taxes on California’s marijuana market released this month by the Reason Foundation found that monthly tax revenues would increase 123% by 2024 if the tax is repealed.
“Taxes affect both consumers’ and producers’ decisions in the legal market primarily by introducing a price disparity between legal cannabis products and comparable cannabis products offered through the illicit market,” the authors of the report wrote.
“We cannot allow the largest cannabis market in the world to fail,” Amy O’Gorman Jenkins, president of Precision Advocacy and legislative advocate of the California Cannabis Industry Association, writes about the study in an email. “High taxes and fees, inconsistent local taxes and the illicit market are contributing to a serious price compression in the supply chain and California’s legal operators are being pushed to the brink. There are tax policy solutions for the governor and state legislative leaders to consider immediately. This study provides that roadmap.”
Newsom’s budget also includes a proposal to maintain the 15% excise tax levied on marijuana but change “the point of collection and remittance for excise tax from distribution to retail on January 1, 2023.” The budget also proposes a $20.5 million fund for grants to support local licensing efforts for retail cannabis businesses.
Newsom said the goal of the initiative is “addressing the persistent issue that is exactly what we anticipated would be a persistent issue—and that’s dealing with the black market, going after the illegal growers and the illegal operators.”
“This is beginning of a process,” he said. “From my humble perspective, in terms of my thinking, this will be a multi-year process to get that black market, get it on the retreat—not the ascendancy—and to get the retail and responsible adult-use market on steady ground.”
Sam Rodriguez, policy director for the cannabis growers industry group Good Farmers Great Neighbors, praised Newsom’s proposals in a statement to Marijuana Moment.
“California farmers are pleased that the governor has taken a leadership role in addressing the ills of the illicit market with a starting point on tax relief,” Rodrigues said. “We look forward in working the legislative budgetary process to obtain more tax relief necessary to stabilize the supply chain. The legal market in our state needs a real bootstrap approach from our state. Anything less will potentially devastate the newly created cannabis economy. And that would be a travesty.”