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Tax relief planned for California’s legal pot industry

In recent weeks Governor Gavin Newsom and multiple lawmakers have expressed support for easing the tax burden on California's cannabis growers and retailers. The industry says high taxes are killing jobs and propping the black market.

SACRAMENTO, Calif. (CN) — Coming to the aid of California’s legal marijuana growers and sellers, state Democrats are preparing to prescribe the struggling industry with an old-fashioned dose of tax relief.

Weeks after cannabis business leaders gathered on the steps of the state Capitol and threatened a coordinated pullout of California’s $4.4 billion legal market, a pair of lawmakers on Wednesday detailed potential tax reforms and promised to crack down on the black market.  

“We definitely have to take action so that the cannabis industry thrives and really benefits all workers and organizations,” said Assemblywoman Blanca Rubio, D-Baldwin Park. “We need a competitive price structure in California.”

Retail marijuana shops opened their doors in 2018 but the industry’s growth — and tax generation — have fallen well short of projections sold to voters under Proposition 64. Currently there are under 1,000 legal dispensaries in the Golden State, a precipitous drop from the nearly 10,000 in operation in 2018.

Critics blame the drop in new business on myriad reasons, from stringent taxes, local prohibitions on legal pot and the booming black market. Industry leaders say the problems have led to high prices for consumers and stymied the once fledgling industry.

Though California is expected to collect more marijuana taxes than ever before in 2022, industry analysts estimate around 75% of weed consumed in the state derives from illegal grows and dealers. So-called “pot deserts” in places like Bakersfield, where local officials have refused to issue retail licenses, are also contributing to the thriving illicit market.  

Legal cannabis is taxed at multiple levels by the time products are smoked or ingested by Californians.

At the top of the supply chain growers are subject to a cultivation tax, then suppliers and retail shops pay both state and local excise fees and finally customers fork over a sales tax. According to Governor Gavin Newsom’s finance department, California will collect nearly $800 million in cannabis revenue in the next fiscal year.

Businesses and industry groups sent a letter to Newsom and state lawmakers this past December calling for an immediate overhaul to the state's cannabis tax system. It appears their reform demands are being taken seriously.

While introducing his 2022-2023 budget proposal which projects a record-high surplus, Newsom told reporters he was in the process of working with the Legislature to “help stabilize the market”. The Democrat signaled he was sympathetic to the struggling cannabis industry and that he hopes the state can figure out how to snuff out the black market for good.  

Weeks later, Democratic lawmakers are picking up the slack.

Assemblymembers Rubio and Cristina Garcia, also from the Los Angeles area, told a coalition of legal cannabis leaders on Wednesday they plan to introduce legislation that would suspend cultivation taxes on pot farmers. They believe support for marijuana tax reform is budding in the Legislature due to the industry’s ongoing plight and the state’s overflowing coffers.

“The numbers just don’t add up,” Garcia told the Save California Cannabis Coalition during a virtual press conference. “If there was ever a time to ensure we have tax breaks that will help the legal market thrive, it’s now.”

The lawmakers said the legislation is still being crafted but hinted both growers and retailers could be afforded tax relief. Any change to the tax rules will require approval by two-thirds of lawmakers in the state Senate and Assembly, a hurdle coalition members believe is possible to clear.  

Lindsay Robinson, executive director of the California Cannabis Industry Association, pointed to Newsom’s recent comments about tax reform as an important development and proof that state leaders are finally prepared to throw the industry a lifeline.

“The signaling from the governor to support legislative lead on tax reduction and reform I think is significant,” said Robinson. “It’s going to take pretty much everything we have to pass something comprehensive that’s going to benefit the industry, but I’m optimistic that this year we’re going to see some change.”

To pair with tax relief, the industry also wants lawmakers to crack down on municipalities that continue to ban legal dispensaries.

According to the coalition, 68% of California lacks local regulations that allow customers to purchase pot from licensed dispensaries. They propose legislation that would require any city or county in which more than 50% of voters approved legalizing marijuana in 2016 to put a program in place for licensing pot dispensaries by July 1, 2022, or have it automatically default to a state program.

Meanwhile amid the push for statewide relief, a collection of cities and counties are acting on their own.

The San Francisco Board of Supervisors recently voted to suspend local taxes on cannabis sales through the end of 2022 to help licensed marijuana retailers compete with cheaper black-market pot sellers. Similar actions have been taken by local leaders in cities like Long Beach as well as Humboldt, Monterey, Lake and Sonoma counties.

The coalition warns 2022 is a make-or-break year for California’s cannabis industry.

“This year, failure for the Legislature to not enact tax reduction is a failure for Proposition 64 and all the consumers that are looking for legal access,” said Jerred Kiloh, owner of The Higher Path and president of the United Cannabis Business Association.

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