Critical Tax Relief to the Cannabis Industry

Last week Governor Newsom signed the state a $308 billion dollar budget that included critical tax relief to the Cannabis industry.  The new budget eliminates the cultivation tax on growers as well as capping the Excise tax at 15% for the next 3 years, both of which have been a big push for our industry…but will that be enough for legal operators to be even remotely competitive to the illicit part of the industry? The impact of taxing has become a huge challenge for the industry as we have seen prices plummet due to over production and the lack of a cohesive plan on how the government (municipal, county, state and federal!) taxes us. Tax rates can vary by location and heavily influenced by the type of license the operator possesses. Tax revenue related to cannabis sales here in California dropped nearly 10% from $317mm in Q4 ‘21 to $293mm in Q1 of ’22. (And for those of you doing the math, that is over $1b the State receives in taxes related to cannabis!)

Many legislators wanted more aggressive actions to be taken, but there is a strong belief that “trailer bills” will follow that could have a further impact on legal operators. Unfortunately another challenge our industry has is the maturity and development of our lobbyists and who gets a seat at the political table.

Because this tax revenue funds a variety of youth organizations and social programs, politicians were loathe to reduce the tax amounts; however alternative funding was found for these programs elsewhere in the budget and did not have to be eliminated. (I guess the $100b surplus the State is currently sitting may have influenced the final outcome?)

So is the State finally recognizing the cannabis industry (unlike many others) can survive on its own without a torrent of subsidies and tax off sets? Next step is to recognize that enforcement of laws against illicit operators could have a significant boost to a struggling industry. Last estimate was that the illicit cannabis market in California is almost $9 billion dollars a year! That’s a whole lot of taxing opportunities Mr. Governor.

Michael Larkins, Managing Partner at High Bluff Group