Governor Newsom has reduced the “killer” tax on cannabis. Did he go far enough?

Ever since California voters gave recreational marijuana the green light in 2016, the cannabis industry has been at odds with the state.

The industry says a variety of reasons make it difficult to stay afloat, including over-regulation, but taxes have been a major sticking point causing frustration. In short, they are damn too high.

A deal reached between Governor Gavin Newsom and the state legislature in California’s budget for the next fiscal year is meant to be a saving grace. It restructures the cannabis tax system and reduces the cultivation tax for producers.

Leafly Editor-in-Chief David Downs explains what the changes mean for the state’s struggling cannabis industry.

Why is it important to eliminate the California cultivation tax?

David Downs: I would say it’s one of the most ridiculous taxes there is. He was a real industry killer.

[Growers] were watching $161 per pound in taxes. It’s good when books [of cannabis] were $3,000 in the 1990s, but now we see books going down to $50 on the farmers’ side – at that point the taxes are three times the rate of the flower itself.

It was the most salient pain point for the industry and it’s one that the Governor and the Legislature really addressed at the top of Assembly Bill 195.

There are three more taxes, but farmers say the crop tax was 25% of their turnover when you look at labour, land, electricity, etc.

What other cannabis reforms are coming?

We are seeing extensive efforts to streamline the application and licensing process for cannabis businesses. Plus, lower taxes help cities open stores and help private equity firms, which are also struggling.

There’s a laundry list…that the industry asked for and it was pretty amazing to see the Legislative Assembly and the Governor pass it.

How will the app change?

AB-195 also increases the enforcement of illegal stores, delivery services and expands. It’s not through criminal penalties, but through fines of $10,000 a day for the owners who host these [illegal] companies knowingly.

What do entrepreneurs and farmers say about the reforms?

I was on a farm in Carpinteria, pacific stone — one of the largest farms in the state — and they expressed relief that those taxes had gone down. But frankly, they seemed beleaguered that they had to pay them so far.

The industry feels like it’s been sucked into California and overtaken by the illicit market. [While] they appreciate and thank the legislators for what they have done, they want to see more to ensure the short, medium and long term survival of [all] players in the cannabis space.

Are these reforms enough?

I think this is the most substantial legalization change since Prop 64 past.

Lawmakers have popped the Prop 64 hood and rewired it a bit to try and keep the engine running, but that’s really nothing to do with the efforts that need to be made locally.

Only one on three California counties even allow [cannabis retail] stores, so you’re going to spend years and millions of dollars to open that store. When you’re open, sometimes a penny on every dollar you make go ahead to the taxman.

Local corporate tax rate on cannabis businesses in Los Angeles are hundreds or thousands of times higher than any other business in the city, including check cashing and gun stores.

We’re now slowly coming down the ladder of feasibility now that the state culture tax is gone, but rubber is really hitting the road with these local taxes, which can be anywhere from zero to 15% on gross receipts – that’s i.e. every dollar that comes in the door.

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