California Gov. Gavin Newsom has been quite friendly to the cannabis industry lately, signing into law more than a half-dozen cannabis-industry related bills.
The bills were intended to add to or subtract from the Medicinal and Adult-Use Cannabis Regulation and Safety Act and the Adult Use of Marijuana Act (Proposition 64) passed in 2016 to legalize cannabis use and sales in California.
Despite Newsom’s apparent warmth toward the industry, at least one expert believes a great deal more legislation is needed to help California cannabis operators.
One of the most noteworthy bills Newsom OK’d was Assembly Bill 37. The bill, which Newsom signed into law this week, allows a deduction of business expenses on commercial cannabis activity under the Personal Income Tax Law.
Under 280E in the federal tax law, cannabis businesses were unable to deduct expenses from their taxes that businesses in other sectors are able to write off.
California tax law had mirrored the federal approach. The Personal Income Tax Law and the Corporation Tax Law, which allow various deductions, had conformed to federal income tax laws with respect to itemized deductions, and existing federal income tax laws disallow a deduction for business expenses for activities that include trafficking specified controlled substances, including marijuana.
Any tax help may be good for cannabis businesses in the Golden State.
Taxes in California on legal cannabis products are sizable, and include a sales tax, a 15-percent excise tax and a cultivation tax of $9.25 per ounce of flowers or $2.75 per ounce of leaves.
Supporters of AB 37 argued that the cumulative tax rate undermines the legal cannabis regulatory system because high taxes cause prices on the legal market to far exceed black market prices, pushing consumers into the latter.
Other bills Newsom signed include a bill enabling marijuana retailers to provide free products to medical patients that meet certain criteria, and a bill promote minority ownership of marijuana businesses.
The bills signed by Newsom are meaningful, but at least one expert believe the state has a long way to go to quash illicit sales and enable the state’s legitimate cannabis industry to thrive.
Tom Adams, managing director and principal analyst at BDS Analytics, a cannabis industry market trends firm, is encouraged by what Newsom has done so far.
“Gov. Newsom has been an open-minded arbiter of a very tough situation that he got handed as he took office,” Adams said.
He thinks much more is needed from Newsom, lawmakers and even voters.
When Proposition 64 passed, allowing usage and sales of cannabis for adult use, advocates believed they had to give away a lot to ensure its passage, according to Adams.
Among the giveaways to ensure Prop 64’s success were a number of burdensome taxes, then seen as a potential boon to state coffers, that now make it difficult to wrench consumers away from well-established black market in California that thrived for years after the passage of Proposition 215, or the Compassionate Use Act of 1996, the California law allowing the use of medical cannabis.
“California has among the highest sales tax rates in the country,” Adams said.
By comparison, the state’s tax haul from alcohol sales was $376 million in 2018, and is projected to be $382 million in 2019. Tax revenues from cannabis were $345 million in 2018, and are projected to be $288 million in 2019.
While those figures may be impressive, they are nowhere near early cannabis tax revenue projections made prior to legalization of adult-use in 2018. Early on in the process, the state Legislature estimated that recreational cannabis would bring in around $1 billion in tax revenue in its first year.
High taxes and strict regulations are why Adams believes the state’s industry has experienced an anomaly, which other adult-use states have not.
“It’s the first state to go adult legal and shrink its legal market,” Adams said.
Other states that have legalized adult use saw revenues from cannabis sales double in the first year, with compound growth rates of between 50 and 90 percent in three years thereafter, according to Adams.
Revenues in California were $3 billion in 2017 after adult-use was legalized, and then cannabis sales shrank to $2.5 billion in 2018.
Sales are forecast to bounce back slightly this year, reaching $3.1 billion in 2019.
“That is just a far cry from the robust growth we’ve seen everywhere else where adult use legalization was instituted,” Adams said.
A recent report shows that heavy taxes and regulatory burdens have buoyed California’s illicit market.
The legal market represents just over 54% of the overall cannabis spending in the state, while states with “more supportive” regulatory environments like Colorado, Oregon and Washington, are on track to shrink the illicit sales percentage to 30% or less of spending by 2024, according to a report out earlier this month from BDS Analytics.
Adams isn’t necessarily calling for Newsom to do more – not by merely signing more cannabis-related bills put before him, anyway.
“I think he’s doing the very best you could expect him to do frankly,” Adams said.
He believes that fixing things and getting California’s cannabis industry on a better track might require another initiative to go before the voters, and that doing so would require a high-up voice in California government to pave the way.
“It would take a state-level leader to gab the bull by the horns and fix Prop 64,” Adams said.
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