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Taxation Troubles

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California’s black market cannabis sales are thriving. About two-thirds of California cities blocked recreational retail shops from opening through preemptive measures, and the state has opened only 621 licensed retailers as of late-May—just one-tenth of what was expected. But by far, the strongest push back into the black market has been Proposition 64’s unreasonably high cannabis tax rates. And on May 16, the California Assembly Appropriations Committee shot down one of the best solutions to the tax problem currently at hand.

The Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), enacted when Proposition 64 was approved in 2016, imposes a 15 percent excise tax on the gross receipts, a cultivation tax of $9.25 per dry-weight ounce on cannabis flowers and $2.75 per dry ounce on cannabis leaves. And once all these taxes are added up on top of any local taxes, California consumers are paying up to 35 or 40 percent tax—far more than is required in nearly any other industry.

Famously cannabis-friendly Assemblymember Rob Bonta of Oakland recently introduced a bill that was intended to help California’s legal cannabis market survive. Assembly Bill 286, or the Temporary Cannabis Tax Reduction bill, would have temporarily cut cannabis sales tax from 15 percent to 11 percent and suspend cultivation taxes for two-and-a-half years in order to help legal retailers compete with California’s robust black market.

The temporary reduction in taxes would help the legal cannabis market catch up with the illicit market. AB-286 cleared the Business and Professions Committee with a 16-1 vote in favor of the bill and the Revenue and Taxation Committee by a 10-1 vote.

At a hearing on May 1, the California Assembly Appropriations Committee expressed concerns about the bill, showing signs of hesitation. “AB-286 aims to combat the illicit cannabis market by suspending or temporarily reducing cannabis taxes,” Assembly Appropriations Committee Chair Lorena Gonzalez stated in a bill analysis. “Supporters argue this will allow legal businesses to offer more competitive prices in order to bring in customers currently buying from illicit market operations. In light of the pending [Legislative Analyst’s Office] report exploring the issue of cannabis taxation, the committee may wish to consider whether this bill is premature given that the legal industry has been operating for just a few years.”

Assemblymember Bonta responded by agreeing to eliminate the sales tax portion of the bill with hope that it would garner enough votes to get it out of committee. But even after amendments, the bill didn’t clear the committee on May 16, narrowing its chances of moving forward this year to nearly zero. Bonta explained later that any bill that “could reduce California’s tax revenue” is extremely hard to pass, possibly explaining why the latest committee hearing didn’t go so well.

“. . . The committee may wish to consider whether this bill is premature given that the legal industry has been operating for just a few years.”

 

On a positive note, the Senate Appropriations Committee advanced Senate Bill 51, which would create a cannabis charter bank and a charter credit union to serve cannabis businesses. Because of the federal status of cannabis, these financial institutions would have to issue special-purpose checks.

For now, Californians will continue to pay steep taxes until something is done to readjust tax rates that continue to push cannabis consumers back into the black market. The black market may be tempting because of its low prices, but paying taxes helps to fulfill the promises that were made before Proposition 64 was approved by voters.

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