California Gov. Gavin Newsom and state lawmakers are poised to eliminate the tax on marijuana growers, in a bid to provide relief to the flagging industry.
However, some in the cannabis industry say that the tax cut doesn’t go far enough, with industry advocates arguing that they were shut out of the process.
In a budget trailer bill, which will be voted on by state lawmakers later this summer, the cannabis cultivation tax paid by growers would be set to zero, while the excise tax — which will be shifted from distributors to retailers — will remain at 15% for at least the next three years.
After that, the California Department of Tax and Fee Administration, in consultation with the Department of Finance and the Department of Cannabis Control, will have the power to adjust the excise tax upward to “capture revenues equivalent to the cultivation tax,” according to an Assembly budget document.
The tax cut won’t come at the expense of the youth services and child care programs which receive funding from cannabis tax revenue; the proposed budget sets a baseline of funding for such services at $670 million, and also sets aside $150 million in general fund dollars to make up for any revenue loss.
The proposed budget includes “additional enforcement tools against the illicit cannabis market and worker protections, including enforcement of labor peace agreements.”
A ‘revenue neutral’ approach
Jim Keddy of youth advocacy group Youth Forward said he is satisfied with what the governor and Legislature have agreed upon.
“I have to say that I’m very appreciative that the governor and Legislature chose to maintain the funding streams for child care and youth prevention programs,” he said.
With a possible recession on the horizon, Keddy said he was glad to see that the proposed budget calls for increasing the excise tax in the near future, making it effectively revenue neutral and ensuring a steady revenue stream for youth services.
“There’s so few reliable funding streams for youth services and child care,” he said.
Moving the goalposts
Not everybody is happy with the proposed budget.
“There’s really nothing good about it,” said Jerred Kiloh, president of the United Cannabis Business Association, an industry trade group for cannabis retailers.
Kiloh said that the new provisions make it easier to tax the industry, and includes plenty of funding for enforcement and audits.
“I don’t really know what the cannabis industry got out of it,” Kiloh said. “There was no relief for taxpayers or consumers of legal cannabis.”
Kiloh referred to a National Cannabis Industry Association survey of cannabis operators across the U.S., a survey which found that just 26% of California respondents report being profitable, according to the North Bay Business Journal.
Kiloh vented his frustration with the governor’s office, which he said had told industry leaders to seek a remedy through the Legislature. Yet lawmakers declined to pass either of two bills that would have lowered the excise tax, Kiloh said.
“Wherever the goalposts are, they keep moving them,” Kiloh said. “...It seems like it’s two steps forward and three steps back.”
Could prices go up?
Despite a tax cut for the growers, Kiloh warned that the proposed budget will lead to rising cannabis prices, particularly in high-rent, high-labor-cost markets like Los Angeles or the Bay Area.
That’s because the excise tax is being shifted to retailers, where “the markup rate for us is about 100%,” a 25% increase from the markup for distributors, Kiloh said.
“What are we doing to the consumers who are supporting legal cannabis?” Kiloh said.
