California has had a difficult time since weed became illegal. Sure, the state built itself a legal market, and enjoys a host of dispensaries and other businesses, but it’s been battling strict regulations, high taxes, and resistant black markets, which all led to an actual bailout last year. Now, in a new move, California finally lowered its cannabis taxes to help improve the industry, becoming the first state to signal that a high tax structure does nothing but sabotage a market.
California is finally overhauling its cannabis taxes in an effort to actually help its wounded weed industry. Are these measures enough to save the day? To stay current on everything important happening in the industry, subscribe to The Cannadelics Weekly Newsletter. Also, it’ll get you premium access to deals on cannabis flowers, vapes, edibles, and much more! We’ve also got standout offers on cannabinoids, like HHC-O, Delta 8, Delta 9 THC, Delta-10 THC, THCO, THCV, THCP & HHC, which won’t kill your bank account. Head over to our “Best-of” lists to get these deals.There is no shortage of cannabinoid products on the market today, so remember to choose wisely and enjoy responsibly.
What’s the news?
First off, this isn’t just a proposal, but an approved legal change via (AB 195), which was put in place at the end of June, 2022, as part of a wider state budget agreement. Cannabis industry groups have been battling California’s long-standing tax structure, which has been in place since the dispensary industry began five years ago. They hope these new tax law changes lead to the ability for lower prices, and better competition with California’s boisterous black market.
What exactly changed? California instituted new laws for cannabis taxes which involve a few different factors, and effect different parts of the market. Here are some of the bullet points highlighted in the new law.
- It creates a tax credit system for some businesses
- It expands labor rights among industry operatives, by lowering the requirement to 10 employees in a business to trigger a mandatory labor peace agreement, which can help employees unionize
- It changes who collects an excise tax, from distributors to retailers, and keeps it steady at 15% for three years (it was set to increase in 2024)
- It eliminates the cultivation tax
- It increases enforcement measures against unlicensed operators
Though it’s #4 on the list, the most important change comes with the elimination of the cultivation tax. Prior to this change, California cultivators were paying out $10.08 as a flat rate for each ounce of flowers produced, a pretty weighty sum when all is added up. This issue was compounded in the last year, with massive overproduction that left growers with overstock they couldn’t get rid of, or had to sell at much lower prices. This problem, and the requirement to still pay the tax, made it hard for some cultivators to continue operation.
The last year was hard on California. Overproduction caused as much as a 50% drop in prices, which made it difficult or impossible for smaller operations to run, and hit outside growers hard, as their product already sells for less. For three years cultivators have been fighting against this tax, and now, finally, they can celebrate its removal.
The tax had also extended to cannabis leaves, and is removed here as well. Prior to the change, cultivators were charged $3 for every ounce of leaves. Though leaves aren’t usually the most sought after part of the plant, they are good for products like creams, and can now become a more viable commodity for growers, according to advocacy group Origins Council’s founder Genine Coleman.
This isn’t just good for cultivators, but consumers as well. Much of the tax burden is put on buyers through increased prices, which are higher than black market prices, often leading people to retain their known dealers. Consumers have to deal with the regular price, excise taxes, and sales taxes, sometimes equaling 50% more than black market offerings.
The new bill was signed by Governor Gavin Newsom on Thursday, July 7th, who promoted a revenue-neutral tactic to ensure funding to social programs meant to receive cannabis tax revue; like child care slots, environmental cleanup measures, and programs to prevent impaired driving. The new budget allocates $150 million for shortfalls for the next three years, with a moratorium on raising excise taxes for those three years.
Is it enough?
Are these changes California instituted for cannabis taxes enough to right California’s ailing legal industry? Or do they fall short of really doing any good in the long term? The excise tax is no small thing at 15%, and the idea it will rise in the future is seen as a disappointment by some, who say these new measures are still not enough to fully compete with the black market. If nothing else, they have three years of time to work on their case to keep it at the current level.
Part of the issue, pointed out by Coleman, is the extensive cost to producers in the form of licensing fees, and compliance requirements for staying environmentally sound. There is also the issue that some parts of California worked to ban the industry after legalization, which is a right given under the 2016 legalization measure, and which Coleman thinks the State should intervene on, to expand retail opportunities.
While cultivators can take somewhat of a sigh of relief, retailers didn’t get off as well. Before the bill was passed, several legislators spoke out on the floor about needing more aid to retailers. In fact, democratic Senator Steven Bradford refused to vote for the bill because of this, and what he calls “minimal and insulting” equity provisions. He introduced his own legislation earlier in the season to reduce the excise tax.
He pointed out that eliminating a cultivation tax mainly helps white farmers, while not allowing more for equity license holders – who are often from minorities. He went as far as to say this could increase racial disparity in the industry, which goes against the entire idea of the equity program to begin with. According to Bradford, “That’s a hard pill to swallow… At some point, when are we going to put the real weight and work behind what we all say exists?”
In terms of equity, license holders who qualify are allowed to keep and reinvest 20% of the excise taxes collected, with licensees entitled to a $10,000 tax credit. $20 million is earmarked for cannabis equity operators, along with $20 million for some retail stores and microbusinesses.
Democratic Senator Scott Wiener also has issues with the bill, saying “We’re going to continue to fuel the illicit market until we acknowledge that there’s over regulation, over taxation of something that we claim we want to see succeed, a legal cannabis market.”
Not everyone sees it negatively though. Of the overall overhaul, says Lindsay Robinson, who serves as executive director for the California Cannabis Industry Association (CCIA), the “survival of the regulated industry is vital to providing ongoing tax revenues for the State and the advancement of public health and safety.” It’s a good point. What’s the point of high taxes, if they dissuade people from buying the product and bolstering the legal system?
She went on, “Eliminating the cultivation tax is just one step towards stabilizing our industry but it’s an important one… CCIA has worked for the past four years to eliminate the cultivation tax and we’re extremely proud of this important first step. Stability of the cannabis supply chain brings jobs and much needed tax revenue to the state while also protecting public health and safety and keeping cannabis out of the hands of children.”
California’s pot problems
All legal markets have an incredibly hard time competing with black markets, a reality that came up in a recent TIME interview with prominent economists Daniel Sumner and Robin Goldstein of UC Davis’s Department of Agricultural and Resource Economics. The economists pointed out that already established connections with dealers, and high prices in dispensaries, often lead buyers to keep their black market dealers. And in a place like California, the problem is even worse than other places, because of stricter regulation and some of the highest cannabis taxes in the country.
It’s always difficult to get hard and fast black market numbers, but from estimates given in 2019, the black market in California brought in $8.7 billion as opposed to the legal market’s $3 billion. Some of the reasons for this include the before-mentioned issue of many California locations opting out of the legal market, coupled with stringent regulations, and extreme cannabis taxes; all of which, according to Politico, have led to a lower number of legal dispensaries per inhabitants, than in other states.
Take Washington state and Colorado, for example, each of which have 17-18 dispensaries for every 100,000 residents. California? Closer to two. At the time of the Politico writing in October, 2021, the state had about 823 licensed dispensaries only.
In fact, California’s weed industry problems are so extreme, that even before these new tax measures went through, California was approved for a bailout in 2021 of $100 million dollars. This is insane for an industry touted as a cash cow, and so soon after its beginning. However, in June of 2021, the State of California agreed to pay out that much to cannabis businesses. The move obviously wasn’t the right one, given the recent follow-up tax decreases this year. It simply cost taxpayers money, rather than immediately attacking the tax issue; which is finally, finally, getting attention now.
Conclusion
Will this new tax structure spell the beginning of recovery for California’s not-well-thought-out weed industry? Or will we be back here a year from now lamenting how what California put in place to reform cannabis taxes, is not far-reaching enough to really save the industry?
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