It has been about ten weeks since the recreational use of marijuana became legal in California, and a group of key lawmakers think it’s time to lower the tax rates imposed by Proposition 64.
AB 3157, which was recently amended, would temporarily halt the $150 per pound cultivation tax, and reduce the state’s excise tax from 15% to 11% for three years.
This temporary reduction, it is believed, will help level the playing field for legal cannabis businesses that are being undercut by cut-rate black market prices.
The sticker shock that many consumers felt purchasing cannabis products after January 1, 2018, was well documented by the media. To add some perspective on what customers faced, one estimate places California’s cumulative cannabis tax rate as high as 45%. This cumulative rate includes the cultivation, excise, and state and local sales tax, but does not including local cannabis taxes that vary by jurisdiction. When local taxes are added, another study puts this number as high as 60%.
Although studies show that other states with legal adult-use, such as Washington and Oregon experienced significant growth in their legal cannabis industry following a reduction in the state’s tax rate, how will the California’s Legislature and regulators deal with two additional issues: enforcement and local taxes.
On the enforcement side, California has the largest cannabis market in the world that is primarily fueled by a deeply entrenched, mature and sophisticated black market. Both state and local regulators understand that a leveling of the playing field between legal and illicit operations will eventually require a strong enforcement mechanism. It will be interesting to see if the Legislature appropriates additional funds in this year’s state budget to enhance statewide enforcement.
Second, the reduction in state taxes in Colorado and Oregon, two states that are highlighted as successful examples of the growth that occurred after tax rate relief, also combined the state level reduction with lower or capped local sales taxes. It could be tempting for local cities and counties to view the state tax reduction as proposed by AB 3157, as a way to increase their taxes to fund enforcement or other local priorities. If this happens, the benefit of leveling the playing field through tax reduction would simply create a new status quo.
Finally, there maybe a question to whether or not changing the tax rate would require another vote of the people. It will be interesting to watch if any of the proponents challenge the legality of AB 3157.
This is an interesting and welcomed effort by many in the industry that are unable to compete with the black market due to the disadvantage high taxes place on their business. This bill that has yet to be heard in its first policy committee as amended. As the bill moves forward in the legislative process, I will keep you updated on any developments.