California governor proposes to abolish taxes on cannabis cultivation

Last Friday, the governor of California unveiled a budget proposal that calls for the elimination of the tax on cannabis cultivation and a review of the distribution of tax revenue from cannabis.

Democratic Governor Gavin Newsom's revised May budget includes measures designed to to combat the illicit market more effectively and to make the legal industry more competitive, largely by eliminating the cultivation tax that cannabis companies are currently required to pay.

These companies are calling for this measure, especially since they are struggling to cope with rising inflation and declining demand compared to the peak of the coronavirus pandemic. The governor emphasized on Friday that he had specifically committed to exploring ways to minimize the influence of illicit growers and sellers on legitimate businesses.

While one might think that eliminating the culture tax would hinder government revenue flows, a recent analysis by the Reason Foundation revealed that monthly tax revenues would increase by 123 % by 2024 if this policy change were adopted.

According to the report, eliminating the tax on cultural products would lead to lower costs for consumers and, as a result, an increase in legal purchases that would more than offset any loss of revenue over time.

Eliminating the cultivation tax would allow farmers and licensed cannabis retailers to lower prices, making California's legal marijuana market more competitive with illicit markets. https://t.co/817c6Oj0Nr

— Reason Foundation (@ReasonFdn) May 13, 2022

However, Gavin Newsom’s proposal is not binding in and of itself. It must be approved by the legislature with a two-thirds majority to be implemented.

«We’ve been working closely with legislative leaders and have made tremendous progress,» the governor said during a briefing on Friday. «We haven’t finalized any of this yet, so I want to be careful not to derail this progress.».

The governor’s revised budget proposal also includes updated estimates of tax revenue allocations for fiscal year 2022–23.

The state expects to allocate $401.8 million for education, youth substance abuse treatment, and school retention, $133.9 million for environmental cleanup and remediation related to illicit cannabis production, and $133.9 million for law enforcement purposes.

«These figures represent a total increase of $74.7 million compared to the governor's budget estimate,» states the budget summary revised. «These estimates also reflect the proposed statutory changes to restructure the cannabis tax framework and maintain a baseline level of funding for this appropriation.»

In addition, the governor’s plan calls for shifting «the collection and remittance point for the retail excise tax to January 1, 2023,» while maintaining the excise tax rate of 15% on cannabis sales.