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California Lawmakers Consider Reducing Pot Tax to Compete with Illicit Markets

California Democratic Assemblyman Rob Bonta’s bill would cut excise taxes down to 11 percent and eliminate cultivation taxes through 2022.

Adam Drury

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Are Unlicensed Operators Accessing California’s Legal Cannabis Market?
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California’s legal cannabis industry still can’t compete with the state’s entrenched illicit market. The reason: fairly simple economics. It just costs too much to go legit. So for the second year in a row, California Assembly Member Rob Bonta (D-Oakland) is backing a bill to give the legal industry a tax reprieve. By temporarily lowering costs for businesses, Bonta hopes the bill will draw more companies, cultivators and consumers (back) into the legal market.

California Lawmakers Take Up Bill to Give Legal Industry a Temporary Tax Break

On Monday, Assemblyman Rob Bonta introduced Assembly Bill 286, the Temporary Cannabis Tax Reduction bill. The proposal, if it passes, would drop California’s excise tax for cannabis retailers down to 11 percent from 15. It would also completely eliminate all cultivation taxes through 2022. In many ways, Bonta’s new bill resembles the bill he introduced in March 2018, which did not pass. The ultimate goal is to reduce the price at the point of sale for consumers. Bonta’s proposal could cut consumer prices 10 percent or more.

From the start of legal retail sales in the state, Bonta and other lawmakers recognized that high taxes would prevent the industry from displacing the illicit market. With plentiful, cheaper alternatives, consumers have been staying with their unlicensed, unregulated sellers. Without tax relief to make cannabis more affordable and the industry more profitable, California risks empowering the illicit market further. Some cities in California have already taken the initiative themselves, slashing local taxes.

Super-High Tax Rates Aren’t Generating the Revenue Officials Wanted

Besides doing little to challenge the dominance of California’s unlicensed cannabis retailers, the high tax rates aren’t generating the cash windfall California officials had hoped it would. Last year, total tax revenue from California’s legal marijuana market came in dramatically underweight. According to state Treasurer Fiona Ma, who supports Bonta’s new bill, Q1 and Q2 tax revenue in 2018 fell more than $100 million below estimates. “We don’t tax start-up businesses from other industries when they start,” Ma told CNBC. “We need to do better.”

Responding to the shortfall, State Assemblyperson Evan Low called the gap between the tax revenue voters got and the revenue they were promised when they voted to pass Prop. 64, “staggering.”

Now, California regulators are struggling to come up with the solutions to rescue lawful operators from their illicit competitors. But the competition isn’t fair, and that’s exactly Assemblyman Bonta’s and Treasurer Ma’s point. A temporary tax break would help level the playing field.

But California’s legal retail industry faces more challenges than high tax rates alone. Besides affordability, there’s also the whole issue of access. Under Prop. 64, cities and counties have the authority to ban commercial cannabis activity within their jurisdictions. So even though California is the largest legal cannabis market in the world, there are huge portions of the state with no or severely limited access to legal, regulated products.

Furthermore, unlicensed cultivators, distributors and retailers have the advantage of non-compliance. They don’t have to cover the costs of meeting workplace safety standards, product testing for chemicals and pesticides and other regulations.

Tax Relief Bill Will Re-Introduce High Rates Once Legal Industry Gains Its Footing

Rep. Bonta’s bill isn’t a permanent tax cut for California’s legal industry. In fact, the bill includes a timeline for hiking taxes back up to Prop. 64-approved levels. “Once the legal marketplace has established its roots, once it is on its way to success, the tax rates will return under this bill,” Bonta said.

For now, however, the lower tax rates could improve not only the legal industry’s chances of success, but the state’s revenue, too. Lower tax rates could mean more tax revenue for California, as cheaper prices draw consumers to legal retailers. And that has knockdown benefits as well, including improved public safety and higher-quality cannabis products.

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