In an effort to save a beleaguered legal cannabis industry that is pleading for help, California is dramatically changing its cannabis tax system, including completely abolishing a tax on farmers.
The modifications, which were approved last week as a component of a larger state budget agreement, will also expand labor rights for those operating in the cannabis industry, create tax credits for some of those businesses, and shift the collection of a state excise tax from distributors to retailers. After pausing at 15% for three years, regulators may decide to boost the tax in order to make up for money lost from ending the cultivation tax.
Leading cannabis industry organizations applauded the proposal for its potential to reduce costs and help legal sales compete with an illegal market that is still thriving six years after Californians approved recreational marijuana use. The legislation was overwhelmingly approved by the Legislature, but despite this, retailers who claim they will not benefit and a number of senators who argued that it did not do enough to address persistent racial imbalances in the business voiced their public displeasure with it.
However, given that Gov. Gavin Newsom signed the tax adjustment on Thursday, it seems unlikely that efforts to enlist further state support will succeed very soon.
“I’m so proud of this legislation. According to Nicole Elliott, director of the Department of Cannabis Control and Newsom’s senior cannabis advisor, it does an unbelievable lot of things for the benefit of all Californians. “So I believe we should pause for a moment to consider the reality that something wonderful was accomplished.”
Cultivation tax elimination was a top priority.
The legal cannabis sector has been seeking to eliminate the cultivation tax for three years, according to Amy Jenkins, a lobbyist for the California Cannabis Industry Association who was intimately involved in the negotiations.
The tax, a flat $10.08 per ounce for flowers, prompted growers to complain that it was impossible to continue operating as marijuana prices fell due to a surplus and a lack of dispensaries to sell it. Over the past year, wholesale prices have decreased by as much as 50%, notably hurting farmers whose outside crops sell for less and forcing the closure of many smaller companies.
Jenkins stated, “We were not able to accept any delays in that happening.”
Supporters believe that removing the cultivation tax will benefit the legal market as a whole, bringing down prices for consumers that are compounded by the wholesale price, the excise tax, and the sales tax.
Genine Coleman, the founder of the Origins Council, an advocacy group that represents cannabis businesses in the legendary Northern California growing region known as the Emerald Triangle, said that it could also make plant trimmings, which were taxed at $3 per ounce for leaves, into another marketable product for farmers. The leaves may be utilized in produced goods like creams.
She said that the elimination of the cultivation tax was amazing. It had become totally impossible.
Given the limitations of Proposition 64, the 2016 legalization law that designated cannabis tax money for child care spaces, environmental cleaning, and impaired driving prevention measures, Coleman said the tax restructuring package was about as good as she could have hoped for.
Newsom campaigned for a revenue-neutral strategy to maintain program funding levels. Before the state can start hiking the excise tax, the budget contains $150 million to make up for potential shortages over the following three years.
Excise tax debate is still ongoing.
Many in the sector, however, are quite disappointed by the impending tax increase and believe that taxes must be reduced even more before legal cannabis can ever compete on price with the black market.
Coleman cited other significant regulatory costs for growers, including as licensing costs and mandates for environmental compliance. She also wants the state to have a bigger part in expanding retail options, which are still illegal in the majority of Californian areas.
It’s completely insufficient. It’s really basic math,” she added. We need tax reform, has always been our stance.
The three-year moratorium on the excise tax rate, according to Jenkins, the industry lobbyist, gives supporters more time to make their case.
Accuracy will be increased by shifting collection from distributors to the point of sale, where goods can be taxed on the actual purchase price rather than an envisioned retail markup of 80%. Jenkins thinks that as a result, tax receipts would possibly increase, giving business a justification for opposing and perhaps even lowering the excise tax.
We still have three years left to fight that battle, she remarked.
For social equity license holders, “crumbs”
Retailers of cannabis, who did not benefit directly from a tax reduction like farmers did, have complained about the agreement much more. Advocates for social equity operators have been particularly scathing in their criticism. These businesses were granted licenses through regional initiatives aimed at diversifying the cannabis industry by adding more people of color, ex-offenders, and residents of areas with historically disproportionate cannabis arrest rates.
Amber Senter, executive director of the advocacy organization Supernova Women, who organized three rallies at the state Capitol this year, said of the bill: “What we’ve gotten are basically crumbs.” “The farmers will feel relieved, they’ll have a little more money in their pockets, but none of that will trickle down,”
As a result of the agreement, equity licensees will be eligible for a $10,000 tax credit and will be able to keep 5% of their excise tax earnings going forward. However, advocates had pushed for more extensive aid, such a complete suspension of the excise tax, to give their companies a better chance to take off.
Senter scorned the tax credit, calling it paltry aid that wouldn’t even be enough to pay for license costs. She also expressed concern about a clause that might ultimately be much more important: The idea reduces the threshold for companies that must enter into labor peace agreements to 10 employees beginning in 2024, giving unions access to speak with and attempt to organize their workers.
Senter stated that “small businesses cannot be unionized.” Small enterprises are going to be destroyed by this.
Some lawmakers want to take more action.
Several legislators spoke out on the floor last week as the bill was being considered by the Legislature against what they perceived as inadequate support for cannabis retailers and equity operators. State Senator Steven Bradford, a Gardena Democrat who introduced legislation this session to lower the excise tax, was one of these legislators. He was one of just a few lawmakers to oppose the bill, calling the measures for equity operators “minimal and disrespectful.”
In an interview, Bradford lamented the fact that equity licensees received far less money than producers, who are mainly white, and who were fully exempt from the cultivation fee. He expressed concern that the proposal would merely exacerbate racial imbalances in the sector, where Black and other communities of color who were targeted during the drug war have already had difficulty thriving.
That’s a difficult pill to swallow, he said. When will we finally put actual effort and weight behind what we all claim to believe in?
Bradford declared he would keep pushing for a reduction in the excise tax for equity operators as well as other measures to prioritize minority-owned companies in state initiatives to expand the legal cannabis industry.
Without a doubt, additional effort is necessary, he stated. “We’ll come back next session if we fall short of that.”
Elliott, the director of the Department of Cannabis Control, justified the tax restructuring agreement by claiming that Newsom and legislative leaders worked together to “simplify, simplify, simplify” the rules for companies in the entire industry.
