California’s cannabis cultivators celebrated the idea of temporary reprieve from high taxes after warning for years that onerous levies, low prices, and suffocating regulations are driving them out of business.
Gov. Gavin Newsom, who has made legalization one of his hallmark initiatives, announced last month a proposal to suspend the $161-per-pound tax levied on all dried flower heading for the commercial market. The change could come to fruition by midnight June 15 when the state legilature is required to pass the budget bill.
Growers have generated $468 million in tax revenue since sales became legal in January 2018. That’s a small percentage of the $3.4 billion Sacramento has collected from the cannabis industry in the same period, but farmers have an outsized impact on the whole pipeline.
In its recent analysis of California’s cannabis taxes, the Reason Foundation, a libertarian think tank, found that eliminating the tax on growers could actually stimulate revenue by as much as 223 percent, to $145 million per month, by December 2024. Reducing the wholesale cultivation tax would lower the price of the raw material and stimulate sales that will reverberate across the sector.
California taxes every segment of the cannabis industry — often more than once.
Indeed, cannabis farmers are uniquely disadvantaged in California. In addition to state taxes, municipalities are permitted to levy their own tax by weight or even the size of the canopy — regardless of how densely planted it is or whether plants are productive.
At the moment, there is an excess of cannabis — an imbalance that drives down the value of the plant but does not affect the cost of manufacturing or distribution. Cannabis consumption doubled during the 2020-2021 COVID lockdown and many farmers increased planting to meet that demand. But sales have stabilized near pre-COVID levels as life returns to normal and there are reports that some cultivators are burning crops because they have nowhere to sell them.
Dale Gieringer, a pioneering cannabis advocate and director of California NORML, said the requirements of the legal market are too onerous. In addition to municipal resistance, he pointed out in the Reason report, licit businesses are subject to state and local licensing fees, as well as “elaborate rules” on cultivation, retailing, transportation, manufacture, testing, facility siting, ownership, security, storage, on-site consumption, wholesale distribution, seed-to-sale tracking, waste disposal, labeling, packaging, environmental compliance, and water usage.
Sacramento has been under unrelenting pressure to reduce the industry’s tax burden, which can double the price of edibles and pre-rolls purchased on the commercial market. Cannabis is a price-driven commodity and the foundation projects that consumers return to the licit marketplace when it is more cost-competitive.
All sectors of the legal pipeline say the final step — the retail outlet — is one of their biggest obstacles. Scores of local and municipal jurisdictions throughout the state have outlawed cannabis dispensaries or imposed sharp restrictions. Proposition 64, the industry’s enabling legislation, grants communities the power to prohibit sales, which in turn made legal marijuana more difficult to find in many communities — even those in which voters overwhelmingly approved legalization.
California is traced with large tracts of “cannabis deserts” in which the nearest legal dispensary might be as far as 100 miles away. The distance funnels these consumers into the cheaper and more convenient illicit market. Legal cultivators — as well as manufacturers and distributors — warn their businesses will remain precarious without a swift and decisive increase in the number of stores and delivery services.
More dispensaries will boost sales, of course, but so will affordability.
“Even with substantial tax reductions the state can expect total revenues to rise substantially in the next two years due to increased consumer demand,” the analysis concludes. “Substantive tax cuts therefore seem to be a feasible strategy for reducing demand for the illicit market, while still retaining reasonable revenues for the state.”