Are Lower Taxes The Solution To Disable California’s Cannabis Black Market?

Last Thursday, lawmakers proposed reducing state taxes for the next three years. A cut in taxes for growing and selling cannabis will enable licensed sellers to gain momentum and stability in their businesses. Many California businesses are complaining they can’t compete because of the high taxes, but the new bill would reduce state excise tax from 15% to 11%, while the cultivation tax of $148 per pound of cannabis will be suspended.

“Criminals do not pay business taxes, ensure consumers are 21 and over, obtain licenses or follow safety regulations,” says Assemblyman Tom Lackey, who is part of the 5 lawmakers proposing the bill. “We need to give legal businesses some temporary tax relief so they do not continue to be undercut by the black market.”

The 15% tax was approved by California voters when Proposition 64 was passed in 2016, alongside the legal cultivation, distribution, and selling of cannabis for recreational use. It wasn’t until January 1, 2018, that license holders could finally grow and sell cannabis. For growers, California’s excise and grow taxes place are another thing to worry about, considering that local tax and sales tax is already as much as 9.2% in certain counties. When consumers purchase cannabis legally, this results in as much as 45% increase in price due to all the taxes combined.

That’s not all – California will soon start charging $1,000 as license processing fees.

But temporarily suspending state taxes will enable them to “help level the playing field,” especially considering the presence of the black market, says Hezekiah Allen of the California Growers Association.

“This is a huge step in the right direction,” Allen says. “Right now, thousands of California businesses are struggling with one-time costs of regulatory compliance. These businesses are at a significant disadvantage to unregulated operators who are continuing to operate in the unregulated market and not incurring their costs.”

Even if Proposition 64 set the 15% tax, Legislature doesn’t have to go back to voting in order to evaluate the changes. The ballot measure permits the Legislature to change taxes through a 2/3 vote, with the condition that it should support the cause. According to Lackey, the proposal will do so by mitigating the effects of the black market on California’s legal cannabis industry. Tax reductions will also invigorate the industry, says New Frontier Data senior economist Beau Whitney. He says that the proposal “will lower the overall price for consumers at the register, which will also reduce the differential between illicit and legal prices.”

According to financial experts, the legal industry has the ability to contribute as much as $1 billion annually through tax revenues, but Gov. Jerry Brown estimates that it could already rack up $643 million by July 1, which is the start of the fiscal year. Even if the new legislation could affect the governor’s budget, Brown’s representative didn’t comment on the bill because it is said the governor doesn’t comment when it comes to legislative proposals that are still pending.

According to Hilary Bricken, a California attorney, the state will benefit from any efforts to support legal operators. “The state’s own regulations calculated the markup on wholesale products to be 60%, which is already being felt by the consumer,” Bricken told Forbes. Additionally, the rules requiring them to add a “sell by” date on cannabis products prior to January 1, 2018, retailers don’t have much inventory to sell for the rest of the year. Bricken also added that the “ridiculously high” costs that businesses are faced with means that they will likely fail before being able to keep up with the requirements.

Bricken also recommends that California needs to find a solution that will get more counties and cities involved in supporting the industry. “The state really can’t go in and dragoon cities and counties because they have their own police forces, and if localities don’t sign on, it’s a moot point period. Large swathes of California will have no access at all,” she says.“ We did it all before in Washington and Oregon, transitioning from medical to recreational, and it was just as painful, but on a much smaller scale,” Bricken said. “It may have been less impactful too, though people not living near dense urban areas like Portland and Seattle certainly suffered.”

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