California marijuana growers would see tax relief under Gavin Newsom’s proposed budget

California Gov. Gavin Newsom wants to give marijuana growers a break by eliminating a tax they’re required to pay even before they make a sale.

Newsom announced Friday in a 2022-23 budget that he intends to seek for the elimination of the cannabis cultivation tax, paid for by the growers.

The proposal must be approved by California lawmakers; it would go into effect July 1 if they agree to it.

Marijuana grown and sold in California is taxed four times: the cultivation tax that growers pay, a state and local excise tax paid for by buyers, and the sales tax paid by the customer.

Currently, cannabis cultivators are required to pay $10.08 for flowers per dry-weight ounce, $3 for leaves per dry-weight ounce, and $1.41 for plants per ounce.

Newsom also called for shifting the point of collection for the state’s 15% excise tax from cannabis distributors to cannabis retailers, beginning in January 2023. The existing tax rate would be maintained.

Despite the tax cut, the governor’s proposed budget includes a baseline of $670 million in annual funding for a period of three years for services currently funded by cannabis tax revenue, including law enforcement programs, environmental restoration and youth education and drug intervention.

That includes $401.8 million for child care and youth prevention services.

“We’re pleased that they set that baseline at $670 million,” said Jim Keddy of Youth Forward, a youth advocacy organization based in Sacramento.

In the event that cannabis tax revenue falls short of that $670 million amount, Newsom’s budget calls for the state to backfill that money from the general fund. The budget proposal also calls for raising the excise tax as an option if revenue falls short.

Keddy said that he is pleased that Newsom is protecting funding for child care in the budget, at least for the next three years.

“Long term, we’ll just have to see what happens, but for the short term, I would say we’re pleased that the governor is protecting kids programs here,” he said.

In the fourth quarter of 2021, California posted more than $308 million in cannabis tax revenue, of which the cultivation tax made up slightly less than $39 million, while the excise tax made up more than $157 million, according to the California Department of Tax and Fee Administration.

Since January 2018, when recreational marijuana became legal to sell, California has collected more than $3.4 billion in added tax revenue.

But all that revenue has come at a cost, industry advocates say. They argue that excessive taxation has led to legitimate cannabis growers and retailers going under while the illicit market continues to thrive.

California’s illicit market still thriving

A University of California analysis estimated that there are just 730 licensed cannabis retailers in the state, and illicit sales constitute an estimated two-thirds of all cannabis sales in the state, according to an industry letter sent to Newsom on Tuesday.

The letter pleaded with Newsom not to raise the excise tax, saying that shifting the tax burden from one license category to another will make no difference in the price of cannabis in California, meaning people will continue to shop for illicit marijuana, which is cheaper.

The nearly 200 cannabis industry signatories, including companies such as Flow Cannabis Co., Glass House Brands and Kiva, urged Newsom instead to permanently suspend the cultivation tax and reduce the excise tax rate to 5%, while permanently suspending excise tax collection from social equity license holders.

The letter argues that the state can use budget surplus dollars to subsidize shortfalls in funding to those programs that are dependent on it.

“Failure to appropriately reform the industry’s tax structure will create an avalanche of adverse consequences. These losses will include the elimination of thousands of union jobs as businesses close, leaving working class people unemployed; the shuttering of social equity businesses; the continued risk of consumers accessing untested, contaminated products; the proliferation of dangerous cartels; and the lost opportunity to use cannabis tax revenues to subsidize critical services like childcare vouchers, programs for the working poor, and youth harm reduction,” the letter reads.

Marijuana tax revolt

One cannabis entrepreneur, Michael Steinmetz, wrote in an op-ed along with his wife Flavia Cassani calling for cannabis businesses to wage a tax revolt this summer if the state did not take drastic steps to alleviate the cannabis industry’s tax burden.

In response to Newsom’s May Revision budget proposal, Steinmetz was measured in his response.

“These are incremental steps,” Steinmetz said.

Steinmetz said that the industry had been bracing for an excise tax increase, something he said was left vague in the budget, but that there was cause to be optimistic.

“I think we’re going to end up in a good spot,” he said.

This story was originally published May 13, 2022 at 12:31 PM.