California Legislators Introduce Temporary Tax Cut to Cannabis Businesses

A bill introduced in the California legislature last month would cut taxes for legal cannabis businesses—a move that its sponsors say will give much-needed relief to business owners and sway consumers to purchase from legal, regulated retailers.

Assembly Bill 286, or the Temporary Cannabis Tax Reduction bill, would cut state taxes for legal marijuana retailers from 15 percent to 11 percent for three years. It would also suspend cultivation taxes through 2022, according to the bill.

The bill was introduced by several legislators, including Assembly Member Robert Bonta (D – Alameda). “The migration of participants in the cannabis industry from the illicit market over to the regulated marketplace has been [slow],” Bonta told Cannabis Business Times in a phone interview. “And one of the biggest reasons is the tax burden, which is operating as a barrier. So that's why this bill is needed now.”

According to Bonta, the cultivation tax amounts to about $148 per pound produced. Between that and lowering the excise tax by 4 percent, “it's a significant reduction,”” in cannabis businesses tax burden, he says. “And, we are being told by participants in the industry that [tax relief] is much needed, [and] will provide significant relief and will really help the legalized market continue to be able to operate,” Bonta says.

Since Proposition 64—the bill the legalized adult use in the state and established the current taxes imposed—was passed in 2016, Bonta says he has heard multiple accounts of business forced to reduce their operations or close because of the taxes.

RELATED: The Golden State Rules

“These are the folks that are trying to play by the rules and do everything right and be legitimate, legal cannabis businesses,” he says. “And meanwhile, there are some businesses in the illicit marketplace who are not complying with the new laws, who are not paying their taxes. And that's not OK. The good actors should be supported as they embrace the state’s regulated marketplace, and should be able to succeed.”

Asked why businesses and consumers stay in the illegal market, Bonta again pointed to the state’s high taxes, saying, “If there's a legalized marketplace with this high tax burden, businesses need to raise the cost of their product to be able to pay for their taxes and cover the cost doing business. That creates an end-of-life higher cost on the product than an illicit market participant who’s making the same product and doesn't pay any of those taxes—they can produce the same product for much less.”

Consumers, for their part, may go to illicit market to save money. “We want all the industry’s participants to be in the legalized marketplace, and lowering taxes will lower the cost of doing business and lower the cost for consumers,” Bonta explains.

Of course, the state wants to make tax revenue from legal cannabis businesses. In fact, legislators have estimates that cannabis taxes will eventually generate $8 to $20 billion in annual revenue for California. This bill would seem to (proverbially) spit in the face of an attempt to earn that money. But Bonta says a temporary tax reduction could actually earn more income for the state in the short and long term.

“It's a little bit counterintuitive,” Bonta admits, “but by lowering the tax rate, we will actually increase tax revenue in California.” He sets up a fictitious example in which taxes are 20 percent for cannabis businesses, but only one business participates. If you were to lower that tax rate to 15 percent and gain 10 participants in the market, "you get more tax revenue with 10 entities paying 15 percent tax,” Bonta points out.

“So that's the idea here,” he says. “We will increase tax base—the number of people paying a tax by lowering it. And when many more participants are in the legalized marketplace paying their taxes, tax revenue for the state of California will go up.”

In the first year of collecting cannabis taxes, Bonta says estimates were about $100 million short of reality. “The projections were that there would be $180 million worth of tax revenue,” he says. “There's been just around 80 million in tax revenue. About $100 million short in the first year. And so, it's incumbent on us to recognize that fact and to adjust accordingly. And I think AB 26 is the appropriate adjustment.”

So far, Bonta says he has received very positive feedback on the bill from business owners and consumers. “They think it's a thoughtful approach that's much needed,” Bonta says. “We're getting great support for this as a sensible way to achieve our goal of having a robust, legalized, compliant cannabis marketplace in California.”