California's sluggish legal cannabis industry could get jump-start with tax cuts
After a disappointing year for cannabis sales and tax revenues in California, a group of lawmakers and the state treasurer are proposing to temporarily slash taxes for marijuana businesses to stimulate the industry.
Growers and sellers had warned that the state’s onerous tax plan would force sellers to raise prices, keeping consumers buying pot on the black market even after recreational sales began in 2018.
Those predictions appeared to come true when the 2018 state tax haul came in a whopping $101 million short of expectations.
“We need to do better,” Treasurer Fiona Ma said Monday at a press conference held at the capital announcing the bill. “This is anywhere from a $6 billion to a $20 billion industry in California. So we want to help them … get into the regulated market and come in from the gray market.”
East Bay Assemblyman Rob Bonta, D-Alameda, introduced the proposed law, Assembly Bill 286, with three other lawmakers. A similar bill proposed last year failed to garner widespread support in the Legislature.
The law would give cannabis businesses a three-year break on taxes by reducing an excise tax from 15 percent to 11 percent and suspending taxes for marijuana cultivators altogether through 2022. Growers are taxed at a rate of $148 per pound of cannabis flower.
Marijuana enterprises must pay multiple layers of taxes in California — including excise tax, cultivation tax and traditional state and local taxes for businesses — that can cumulatively create a tax rate upward of 45 percent in some parts of the state, Ma said.
Marijuana growers in Santa Rosa pay a tax of 2 percent on annual sales or $5 per square foot of cultivation space.
In Sonoma County, growers pay between $2.34 and $11.69 per square foot depending on the size of the project. The largest outdoor marijuana garden permitted in Sonoma County is one acre.
When California was establishing its regulations for legal marijuana, industry leaders warned against steep tax rates that could make the price of legal pot too expensive compared to California’s entrenched black market pot.
Those concerns have borne out.
During the first year of recreational sales, Californians spent $500 million less on legal marijuana than they did in 2017 when it was only legal for medicinal purposes, according to cannabis industry research firm BDS Analytics.
In Santa Rosa, tax revenues for the last fiscal year were $468,000, far below early projections the city would bring in $2.5 million in taxes annually from cannabis businesses.
“This legislation is much needed,” said Erich Pearson, founder of SPARC dispensaries in Sonoma and San Francisco counties, who is operating organic and biodynamic cannabis farms in the Sonoma Valley.
Legal businesses are “mired in regulatory and compliance costs” and the tax burden is disproportionately burdensome for those growing marijuana outside rather than in warehouses that can generate numerous harvests throughout the year, Pearson said.
“All taxes, regardless of where they are in the supply chain, pass through to the consumer,” Pearson said.
“So reducing either cultivation, retail or a combination of both will drive more consumers to the legal market.”
Some industry leaders wanted the state to take a more dramatic approach.
A tiered-tax program could draw greater revenues from large producers, such as the massive greenhouse cannabis cultivation companies on the Central Coast, said Hezekiah Allen, founder of Emerald Grown cooperative of marijuana growers and a former chairman of the California Growers Association.
A 4 percent reduction in the excise tax rate “isn’t going to be a game changer” but any effort to lower taxes is welcome, Allen said.
Last year, opposition to state cannabis tax cuts came from service worker groups slated to benefit from these revenue streams, Allen said. With tax revenues falling short and newly installed Gov. Gavin Newsom, who has supported creating a legal and regulated marijuana marketplace, the proposed legislation is on sturdier ground, he said.
“The top-line response is tax reform is much needed, and it’s great the lawmakers get that,” Allen said.
The pot tax cut measure is co-authored by Assemblymen Tom Lackey, R-Palmdale, and Reginald Jones-Sawyer, D-South Los Angeles.
You can reach Staff Writer Julie Johnson at 707-521-5220 or firstname.lastname@example.org. On Twitter @jjpressdem.