Less is More

[dropcap class=”kp-dropcap”]C[/dropcap]alifornians pay far too much in taxes on cannabis. Beyond the 15 percent excise tax that consumers see at the counter, the state’s cannabis is also subject to a cultivation tax at $9.75 per ounce, the standard sales tax base at 8.75 percent, plus any applicable local sales or excise taxes. What this means is that cannabis taxes at the counter could soar as much as 35-45 percent—much more than you’d see on any other agricultural product.

The exorbitant taxes that California levies on cannabis businesses have forced lawmakers to act—lest the industry returns to the un-taxed black market. On Jan. 28, lawmakers introduced Assembly Bill 286 to amend Sections 34011 and 34012 of California’s Revenue and Taxation Code and lower California’s cannabis excise tax rate from 15 percent to 11 percent.

The bill was introduced by Assemblymembers Rob Bonta, Ken Cooley, Reggie Jones-Sawyer and Tom Lackey, plus California State Treasurer Fiona Ma. Rep. Lackey pointed out that California’s cannabis tax revenue fell about $100 million below what former Gov. Jerry Brown’s office projected in 2018. Rep. Bonta stated that legal cannabis businesses that pay the high taxes “are not able to compete with the black market.” Ma also stated publicly that the 15 percent excise tax in particular is far too high, and that California doesn’t burden start-ups in any other industry as much as the cannabis industry.

Fitch Ratings estimated that Californians who purchase their cannabis at law-abiding dispensaries are paying as high as 45 percent in total taxes. It’s a rate that you wouldn’t see anywhere else. Beer and wine vendors, for instance, are subject to a tax of $0.20 per gallon plus the general state sales tax and applicable excise taxes. But it’s still not comparable to what cannabis businesses are subject to.

“This bill would reduce that excise tax rate to 11 percent on and after the operative date of this bill until June 1, 2022, at which time the excise tax rate would revert back to 15 percent.”

The California Highway Patrol seized almost eight tons of illegal cannabis between January and November of 2018, which was nearly double the amount seized in 2017. The bill would help solve the problem of the persistent black market.

“This bill would reduce that excise tax rate to 11 percent on and after the operative date of this bill until June 1, 2022, at which time the excise tax rate would revert back to 15 percent,” the bill reads. “This bill would suspend the imposition of the cultivation tax on and after the operative date of this bill until June 1, 2022. This bill would make specified findings and declare that its provisions further the purposes and intent of the AUMA. This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.”

On Feb. 19, the California Department of Tax and Fee Administration released its totals for cannabis sales and excise tax receipts for the fiscal 2018 year. California raked in $345.2 million, but it was far less than early estimates and about $100 million below more recent estimates.

Do high taxes really generate more revenue for the state when the taxes up pushing people into the black market? Probably not. That’s why lawmakers are desperately trying to solve the problem, beginning with a lower excise tax—a tax that is more realistic in nature and that doesn’t place a much higher burden on the cannabis industry compared to other industries.