California Looks at Tax Cut to Boost Sluggish Pot Sales

SACRAMENTO, Calif. (CN) – Seeking a “tax holiday” to boost sluggish recreational marijuana sales, California lawmakers have reintroduced a bill that would temporarily lower taxes for the legal pot industry.

A bipartisan group of Assembly members said Monday that California should learn from other states that have legalized cannabis – including Washington state and Colorado – and simplify the tax system to encourage growers and sellers to join the legal market. Assembly Bill 286 would lower the voter-approved state excise tax from 15 percent to 11 percent and eliminate a cultivation fee of $148 per pound of marijuana for three years.

Assemblyman Rob Bonta, D-Oakland, hopes the tax cut will soften the financial burden that has kept many growers operating on the black market since the Golden State began allowing recreational use in January 2018, and subsequently fill state coffers. 

“Those good businesses, those good actors, are not able to compete with the black market product if they can’t be competitive on price and on cost,” Bonta said at a press conference. “By lowering the tax rate, you actually increase the tax revenue.”

California voters approved recreational marijuana use in 2016, with proponents painting legalization as a boon to both the economy and public safety. But more than one year into the switch, tax revenues have fallen nearly $100 million short of what the state predicted in its current budget.

Critics say the state’s tax scheme is too complex and that startup costs associated with opening a legal marijuana business have given the black market a decided edge.

State Treasurer Fiona Ma, who has previously advocated for a state-chartered cannabis bank, says for several years her office has been studying ways to get more marijuana businesses to pay their taxes. Ma, a Democrat, says the common complaint from the industry is that state and local taxes are too high: She estimates that some California pot businesses are paying cumulative tax rates of up to 45 percent.

“This is the only industry where we are assessing high taxes at the front end [for startups], which is not a guarantee of success here,” Ma said. “We need to do better; this is anywhere from a $6-20 billion industry here in California.”

The coalition includes Republican Assemblyman Tom Lackey of Palmdale and Democrat Reginald Jones-Sawyer of Los Angeles, and it pushed for the same tax freeze last year. That bill, Assembly Bill 3157, was defeated in the appropriations committee and didn’t make it to the governor’s desk.

Bonta said that while he hasn’t talked with Gov. Gavin Newsom about Monday’s proposal, he believes the new governor would be open to it. Newsom was a major proponent of the 2016 legalization effort while he was lieutenant governor.

The California lawmakers are looking to Washington state, Oregon and Colorado, where cannabis revenues also started out slow but rebounded after lawmakers implemented tax reforms. According to credit rating agency Fitch Ratings, Washington’s cannabis tax revenue totaled $13.4 million in the last month with its original tax system but jumped to $33 million less than two years later under the renovated tax framework.  The credit agency warned of the likelihood that California wouldn’t meet expected tax revenue estimates prior to legalization.

“California's high taxes are likely to keep black market prices competitive into the long term. The state's black market will also benefit from its long history as a supplier to states where nonmedical cannabis remains illegal,” Fitch Ratings predicted in a 2017 report.

Jones-Sawyer said that while there are over 170 licensed marijuana businesses in Los Angeles, they are competing against 1,700 illegal ones which don’t pay taxes at all. 

“We should have the most vigorous, vibrant cannabis business in the country, if not the world,” Jones-Sawyer said. “Ultimately we need to suppress the black market until it completely goes away.”

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