Will California succeed in reforming its cannabis tax system?

California's cannabis industry still struggling to fight the black market. In addition to a lack of sales outlets, with only 23% of cities accepting cannabis businesses on their territory, Californian cannabis suffers from very high taxation, preventing it from being competitive in an unregulated market.

The price of cannabis products sold in legal dispensaries can therefore be two to three times higher than the price of cannabis products sold in legal dispensaries. higher than that of almost identical items sold in unlicensed stores, which are not subject to the cultivation or excise taxes that drive up costs for retailers.

Among the taxes, culture tax is given special attention. This tax is determined by weight, which means that the tax burden does not decrease as the value of their crop falls due to competition with these unlicensed growers. The tax is also adjusted for inflation.

Last February, California Senate Majority Leader Mike McGuire announced a tax reform bill.

«Cultivation taxes are crushing small farmers throughout the North Coast and California. This legislation will provide much-needed tax relief to struggling small cannabis growers before the market collapses,« McGuire tweeted last month. «We can't continue to tax family farmers by the weight of the product - because when prices drop, taxes remain disproportionately high. It's simply not sustainable.»

https://twitter.com/ilike_mike/status/1494454554984808455

His proposal, the SB 1074, recommends abolishing the cultivation tax as early as next July and simultaneously increasing the excise tax on cannabis, which currently stands at 15 % at retail. From July 2025 to July 2026, this increase would «generate half the amount of revenue that would have been collected under the cultivation tax». Then, from July 2026 onwards, the increase would be such that it would «generate the full amount of revenue that would have been collected under the cultivation tax».

Legislative push

To solve the problem, several proposals had already been put on the table, such as tax products according to their THC content. At the end of February, three other bills attacking cannabis taxes followed. And each of them takes a different approach.

The project SB 1281 «The bill »would also end the imposition of the cultivation tax«, but »would also reduce the excise tax to 5 %", down from 15 % at retail. The bill also provides that this tax does not include a mark-up, usually set by the California Department of Tax and Fee Administration every six months. Finally, the bill calls for distributors no longer to «collect the excise tax from the cannabis retailer» and «remit the excise tax to the department», but for the remittance to be the responsibility of the retailer. All this would take effect at the beginning of 2023.

The proposal AB 2506 «suspends the imposition of the culture tax from July 1, 2023 to July 1, 2028, and removes the requirement for the Department to adjust the culture tax rate for inflation for calendar year 2023 and during the suspension.» Second, like McGuire's bill, it would increase «the excise tax by an additional percentage that the Department of Finance believes will generate the amount of revenue that would have been collected under the culture tax», but would do so «from July 1, 2023 to July 1, 2028».

The project AB 2792 contains the greatest number of changes. It would eliminate the inclusion of the gross-up amount in the excise tax, but only from July 1, 2022 to July 1, 2025. It would also suspend, during this period, the excise tax for «purchasers of cannabis or cannabis products sold in this state by licensees entitled to a waiver or deferral of fees pursuant to the program established by the Department of Cannabis Control under the California Cannabis Equity Act« . It also suspends, during this period, the culture tax and «removes the obligation for the Ministry to adjust the culture tax rate in line with inflation during the suspension».

It will probably be difficult to find a consensus on a fiscal plan. But the health of California's legal cannabis industry depends on it.