Lawmakers want to cut California’s pot taxes to help lagging legal market

Reporting from Sacramento —  Frustrated that California’s licensed marijuana industry is struggling to compete against the black market, a group of state officials is pressing to slash taxes on legal pot shops and growers.

Lawmakers acknowledged that a year after the state began issuing licenses for growing and selling marijuana for recreational purposes, the legal market has been stunted by red tape, the refusal of cities to allow pot businesses and the burden of paying state and local taxes.

State Treasurer Fiona Ma and five legislators proposed a bill Monday that would cut the state excise tax on marijuana sales from 15% to 11% for three years, and suspend the cultivation tax of $148 per pound during that period.

“The black market continues to undercut businesses that are complying with state regulations and doing things the right way,” said Assemblyman Rob Bonta of Alameda, the primary author of the measure. The tax cut, he said, will help “keep customers at licensed businesses and help ensure the regulated market survives and thrives.”

The issue is urgent, industry officials say, because marijuana remains an illegal drug under federal law and enforcement has been deferred in the past only on the condition that states have a well-regulated market.

Bonta coauthored the bill with fellow Democratic Assemblymen Reginald Jones-Sawyer of Los Angeles, Mark Stone of Scotts Valley and Ken Cooley of Rancho Cordova, and Republican Assemblyman Tom Lackey of Palmdale.

The excise tax was required by Proposition 64, an initiative approved by California voters in 2016 that legalized growing and selling marijuana for recreational use. Taxes were proposed to cover the state’s cost of regulating a legal market.

California began licensing businesses in January 2018, but the number of pot shops and growers that have gotten permits is far below what officials estimated. The state budget originally anticipated $630 million in pot tax revenue this fiscal year, which ends June 30, but the number was revised down this month to $355 million.

The money is supposed to cover the state’s cost of licensing firms and enforcing the law, as well as to finance programs that discourage minors from using cannabis and studies on the impact of the pot on driving and health.

Industry officials say a major impediment has been that the added state and local taxes can increase the retail cost of marijuana by some 40%.

Other states with legal cannabis markets, including Washington and Oregon, have acted to reduce their tax rates and encourage the adoption of the legal market, Bonta said. He said that after Washington simplified its tax structure and reduced its rates, tax revenue grew from $13.4 million in June of 2015 to $33.1 million in April of 2017.

Lowering the excise tax and postponing the cultivation tax will reduce prices for cannabis consumers, making the legal market more competitive, said Beau Whitney, senior economist at New Frontier Data, a firm that analyzes cannabis markets.

Ellen Komp, deputy director of the pro-marijuana group California NORML, supports lowering taxes to assist the industry and consumers.

“The sticker shock from cannabis taxes has sent many consumers back to black market providers,” she said, adding it has particularly hurt low-income medical marijuana patients.

But Kevin Sabet, president of the anti-marijuana group Smart Approaches to Marijuana, says the tax cut would lead to more drug use.

“When drugs are cheaper, more people buy them and buy them more often,” Sabet said. “We don’t need more stoned drivers, stoned workers and stoned parents and students in California.”

Ma said the legislation is needed to jump-start a new, regulated industry.

“We are helping legal cannabis businesses with their transition into the marketplace, just like we would for any start-up industry,” she said.

Bonta proposed similar tax cuts last year but they stalled in the Legislature amid concerns that they would significantly reduce revenue to state coffers.

A report by legislative staff estimated last year the cuts would reduce annual funds to the state by up to $297 million.

Assemblywoman Lorena Gonzalez Fletcher (D-San Diego), chair of the Assembly Appropriations Committee, said at the time that the state could not afford the loss. “It was really expensive,” she said.

Newsom, who was instrumental in putting Proposition 64 on the ballot, has not taken a position on the latest proposal to cut taxes. If the measure is sent to the governor, “it would be evaluated on its own merits,” spokesman Brian Ferguson said.

Lackey, a retired California Highway Patrol officer, said the tax reduction is needed to address public safety issues.

“Right now the illicit market is dominating California’s cannabis industry,” Lackey said. “These are bad people who are making our communities unsafe. We need to give the good guys a chance to succeed; otherwise our one chance at creating a regulated industry will be compromised.”

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