Governor Offers Reprieve to Cali’s Tax-Burdened Cannabis Cultivators

As the first U.S. state to legalize medical cannabis and the largest for potential sales, California has been falling behind other states in one crucial area… making it profitable for cultivators. Even four years after adopting recreational cannabis sales, California’s market has grown to just one-third of its expected size and its cannabis farmers are seeing profits plowed under. On May 13, Governor Gavin Newsom announced his revised his 2022-23 budget, proposing to eliminate cannabis cultivation taxes in the Golden State. Newsom’s proposal would amend the recreational marijuana legalization ballot measure approved by California voters in 2016.

If Newsom’s budget passes legislation, cultivators will see early freedom on July 1st, 2022 with a temporary tax rate of zero on cultivation, according to the state’s Department of Cannabis Control. Cannabis cultivation, point of collection and remittance for excise taxes will be shifted to the consumer through sales, but the expectation is profitable yields – freed from taxes as high as $1,441 per pound – will drop legal prices. Low taxes on cannabis cultivators in Oregon and Colorado see residents spend nearly 400% more per capita on affordable, legal cannabis than Californians, according to a study published by the Reason Foundation.

“We have heard from many of you who have said that the current cannabis tax framework is overly complex,” said Department of Cannabis Control Director Nicole Elliott said in a public release. “We know that current tax policies disproportionately burden cannabis farmers and small businesses and create instability throughout the supply chain, ultimately undermining the societal benefits of a taxed and regulated market.”

The state’s cultivation tax is widely seen as make-or-break situation by many growers.

“California’s cannabis farmers are experiencing the biggest challenges of their time. Many farmers are considering going fallow this year. Busy Bee Organics, one of the first woman-owned, sun-grown farmers in Santa Barbara, has already declared she’s not planting this year,” said Sam Rodriguez, policy director of Good Farmers Great Neighbors – a California alliance of cannabis farmers and businesses. “California’s cultivation tax is regressive and has only contributed to uncertainty about the future of the state’s cannabis farmland economy and whether it can survive.”

Sometimes its own worst enemy
The proposal includes $670 million annually as funding for youth education, intervention and treatment. Allocation 3 will also fund state and local law enforcement programs. Tackling the black market is seen as key to the success of regulated cannabis in California. According to Statista – a provider of market and consumer data –  sales in black market cannabis reached approximately $8.7 billion in the state in 2019. The legal cannabis market took in sales of only $3.1 billion that same year.

When it comes to battling illicit cannabis sales, California’s local governments are in many ways their own worst enemies. Stores selling cannabis for recreational purposes have been banned from 80% of the 482 municipalities in California, reported Reason Foundation. Oregon has one legal cannabis retailer for every 6,145 residents and Colorado has one legal retailer for every 13,838 residents while California has just one legal cannabis retailer for every 29,292 residents, its study found. Programs that incentivize municipalities to reexamine their policies and expand legal access to cannabis could help end the bootlegging.

“We are experiencing first-hand a serious price compression in the California supply-chain in part as a result of the illegal market, high taxes and fees and a patchwork of inconsistent local taxes driving legal operators to the brink of a financial cliff,” said Amy O’Gorman Jenkins, president of Precision Advocacy and a lobbyist for the California Cannabis Industry Association. “We cannot allow the largest cannabis market in the world to fail.”