California Lawmakers’ Bill Would Cut Cannabis Taxes In Order To Cut Into Black Market Sales

Mar 19, 2018

A bipartisan bill has been introduced in California to lower cannabis taxes. Should it pass, it could temporarily reduce taxes on the state’s recreational cannabis by about 9 percent. The purpose of the proposal is to help California marijuana merchants compete with black market prices.

The legislation, which comes two and a half months into the state’s recreational marijuana launch, is aimed at "keeping customers at licensed stores and helping ensure the regulated market survives and thrives,” according to Oakland-based Democrat, assemblyman, Rob Bonta who introduced the legislation with Assemblyman Tom Lackey, a Republican from Palmdale.

Rob Bonta said the proposal is intended to help legal businesses compete with black market prices during the transition period into the regulated market.

“If we don’t get it right in the beginning, it will be hard to make up for it later and correct in the future,” Bonta said.

Bonita reasoned that "California cannabis businesses are making significant investments as they embrace the regulated marketplace while, at the same time, being undercut by unregulated competitors."

Recreational marijuana became legal in California at the start of this year. Since that time, dispensaries and cultivators have been struggling to make the transition. Between banking challenges, high taxes, regulatory changes, and black market competitors, merchants and cultivators have a lot to deal with that the black market does not.

Lackey said in a statement,  “Criminals do not pay taxes, ensure customers are 21 and over, obtain licenses or follow product safety regulations. We need to give legal businesses some temporary tax relief so they do not continue to be undercut by the black market.”

How Much Is Too Much

There have been many complaints among both activists and lawmakers - not to mention the cannabis industry itself - about the piling on of fees and taxes by county and local government. The complaint is that the added cost makes it hard for legitimate businesses not to be undercut by black market sellers.

First, state cultivation taxes are set at $9.25 for every ounce of cannabis flower and $2.75 for each ounce of leaves. Next, the state of California imposes a 15 percent excise tax. Many county and local governments add sales taxes on top of that. Then there are additional costs for regulatory compliance such as testing and distribution which also increase the price to consumers. Yolo County has a June ballot measure that would boost taxes further there.

The measure would suspend the $148-per-pound tax on cultivation and reduce the excise tax on sales from 15 percent to 11 percent. The relief would expire in June 2021.

In a report by Associated Press which first appeared in Leafly, authors Michael R. Blood and Don Thompson write, “Generally, an eighth of an ounce of good-grade pot, enough to roll five or six joints, sells for around $35 in legal shops in the Los Angeles area. Direct taxes alone would slap over $12 on that price: the 15 percent state excise tax, the city’s 10 percent tax on recreational purchases, and the usual sales tax, nearly 10 percent. Store policies appear to vary on how much of that cost is reflected in the advertised price on websites.”

Solving For Price

"We need to give legal businesses some temporary tax relief so they do not continue to be undercut," Lackey said.

According to a report in Forbes, California-based attorney Hilary Bricken commented in a recent interview that anything the state can do to promote legal operators would be critical to the industry's success. Bricken has already witnessed the transition to legal adult use in two other states.

Bricken says in the report, "The state's own regulations calculated the markup on wholesale products to be 60%, which is already being felt by the consumer."

She says due to the "ridiculously high" cost of compliance most cannabis businesses will likely fail under current conditions.

According to Bricken, the cost of cannabis in many parts of California has now risen to between $15 and $25 a gram. "But in Colorado, Washington, and Oregon, you can get a gram for between $1 and $3, which is competitive with the black market.”

The California marijuana market is valued by experts at several billion dollars annually. It’s estimated that, as things stand, without the new bill, California stands to collect as much as $1 billion in marijuana taxes over the next few years.

The bill is now awaiting referral to a California State Assembly policy committee. According to Leafly, the bill must first make it to the assembly floor for a vote. If passed, it would then be moved to the Senate.

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