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California Reduces Cannabis Taxes to Boost Fledgling Industry

The California Legislature recently took several significant actions to reduce the tax burden on the legal cannabis industry in the state, which is struggling to compete with the illicit market. The industry has been demanding relief for far too long, and although the bill does have some faults that have been called out by politicians, it aims to accomplish several important objectives. 

By overhauling its tax structure for cannabis products, the State Legislature hopes to help the legal cannabis industry get on firmer financial footing. Specifically, some of the actions they took include generating tax credits for some retailers, strengthening the rights of workers in the cannabis industry, and reducing the tax burden on distributors by eliminating the excise tax (though retailers will now have to bear the burden of that tax, and many aren’t happy about it). 

For the next three years, retailers will have to pay a 15 percent excise tax, but once the three-year mark passes, it’s possible that the tax will be increased. This is because the legislation also took the major step of eliminating the cultivation tax for growers. 

The new legislation enjoyed broad approval in the state government, and specific advocacy groups within the cannabis industry applauded the plan, citing its ability to help the legal cannabis market compete with illegal sales by reducing costs. Even though California officially legalized recreational weed in November of 2016, the illicit cannabis market is still going strong. 

However, despite the support the tax restructuring plan received in the Legislature and among industry leaders, retailers are not as thrilled about the legislation. Retailers have argued that the new plan mostly benefits growers, and that it will not improve the racial disparities that plague the industry. 

Some lawmakers also complained that the legislation simply does not go far enough and that more action is needed. Unfortunately, it doesn’t seem like Governor Gavin Newsom is likely to advocate for additional legislation anytime in the near future. Governor Newsom’s top cannabis adviser Nicole Elliott remarked to CalMatters, “I’m incredibly proud of this bill. It accomplishes an incredible amount of things for the betterment of all Californians.” 

One of the main priorities of the new legislation was to get rid of the cultivation tax on growers. For three years, cannabis lobbyists have advocated for this tax to be eliminated, which supporters argued was hurting the legal cannabis industry by making it harder for growers to run profitable operations. The price of marijuana had significantly dropped due to an excessive supply paired with an insufficient number of dispensaries to sell legal products. In fact, some small producers have gone out of business specifically because the tax burden was too high given the fact that wholesale prices had plummeted by half in the previous year. At one point, the tax burden on growers was $10.08 for every ounce of flowers sold. 

Advocates for the legislation believe that getting rid of the tax will have a trickle-down effect within the legal cannabis market. They hope that it will lower consumer costs enough to help the legal market contend with illicit sales. Coupled with wholesale prices and other taxes (including sales taxes and excise taxes), the cultivation tax didn’t just hurt growers; it also made the entire legal cannabis industry less viable. 

Still, supporters say that nixing the cultivation tax will also make plant trimmings (such as leaves) a profitable product for growers. When the tax was still in effect, plant trimmings were subject to taxes as high as $3 per ounce of leaves. Now that that tax burden has been removed, marijuana trim may offer growers another viable source of revenue. Trim is often used to make cannabutter, THC-infused drinks, marijuana extracts, and topical cannabis creams. 

Some supporters also believe that the restructuring plan was the best the Legislature could do, due to the fact that under Proposition 64, cannabis taxes have been designated toward funding certain initiatives, including initiatives to battle youth substance abuse, prevent intoxicated driving, and fund environmental restoration and protection. The Legislature allocated $150 million to ensure that programs and initiatives currently funded by cannabis taxes still get the money they need. 

However, this amount only protects funding for the next three years, after which time regulators will have the option to increase the excise tax. The excise tax has been the subject of much debate and discord amongst those who argue that tax reform has not gone far enough. Although they no longer have to pay the cultivation tax, growers still have to pay licensing costs, not to mention the costs they incur to ensure compliance with environmental standards. If the excise tax increases in three years, growers could have to grapple with a significant tax burden again. Raising the excise tax could eventually harm the legal cannabis market as a whole. 

Industry professionals are hoping that the hold on the excise tax rate will give the industry three years to advocate for further reform. In addition to retailers, social equity operators have been critical of the bill, arguing that the cultivation tax will not trickle down to equity licensees. Programs designed to foster social equity have made licensing operators from certain marginalized groups a major focus, with the goal of making the industry more diverse. These demographics include people of color, individuals who were formerly imprisoned for marijuana-related convictions, and people who live in areas where cannabis arrest rates were especially high.

While social equity operators will enjoy some benefits under the new plan — including a $10,000 tax credit, and having the ability to retain a small portion of the revenue generated by excise taxes — advocates have called these benefits “crumbs.” Some lawmakers have also spoken out on behalf of retailers and social equity operators. Growers, who received a tax cut, tend to be a largely white demographic, but equity operators did not receive similar tax benefits under the package, highlighting ongoing, systemic racial disparities within the industry. Some equity operators and lawmakers are calling for the excise tax to be reduced or eliminated altogether. 

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