Sacramento Capitol buildilng (Micadew/Wikimedia Creative Commons)

State Legislators Target Pot Taxes With AB 1948

January 27, 2020

As the state's legal cannabis industry continues to float on top of an underground market three times its size, the debate has again kicked off around lowering California's pot taxes to make legal marijuana more competitive with its readily available tax-free alternative.

And with the number of communities that don't even have proper access to marijuana in California two years after legal sales began, it's easy to see why people aren't making the drive to the store for their pot, never mind how much more expensive it is once you add taxes.

In an attempt to put a little wind back in the cannabis industry's sails, lawmakers in Sacramento began an effort to lower the state's cannabis taxes for the third year in a row. Assembly Bill 1948 would eliminate cultivation taxes and lower the state excise tax from 15 percent to 11 percent for three years.

California NORML said last year's tax-reduction bill AB 286 stalled pending a newly released Legislative Analyst's Office report that recommends major changes to the state's cannabis tax structure. What may help this year's effort is the fact that the report used 11 percent as a possible tax rate ? just like AB1948. Analysts found that while the new rate could lower tax revenue in the short term, it would give legal operators a better chance against black-market weed that's significantly cheaper.

The general goals of the LAO report were to undercut illicit market prices, making sure California is actually creating a situation to drive revenue, and preventing kids from getting their hands on marijuana.

First and foremost the report's authors noted that the most important thing to actually do with the money was reduce harmful use. And if everyone is buying black-market weed, there is less revenue for mandated programs meant to mitigate the impact legal marijuana.

Accordingly, we recommend that the Legislature replace the existing retail excise tax and cultivation tax with a potency-based or tiered ad valorem tax, as these taxes could reduce harmful use more effectively, the report noted. If policymakers value ease of administration and compliance more highly than reducing harmful use, however, the Legislature might prefer to keep the existing retail excise tax. In contrast, we see little reason for the Legislature to retain the weight-based cultivation tax.

Another recommendation was, once lawmakers choose the type of cannabis taxes they want to impose, to specify the taxed event when the state gets its money as opposed to the array of math formulas currently used for proper collection.

Perhaps the wildest recommendation from the LAO report was certainly the move to a potency tax, we recommend that the Legislature specify the details of the tax structure in consultation with scientific experts. Such expertise ? informed by the state's track-and-trace data ? is crucial for determining key details.

The LAO said currently available information suggests that a potency?based tax in the range of $0.006 to $0.009 per milligram of THC could be appropriate. So for every gram of pure THC, you're looking at a tax of $9. But it would be curious to speculate how the state would adapt for other cannabinoids. For example, it's hard to imagine someone stripping all the THC out of a cartridge but leaving everything else in is going to be able to sell a tax-free product.

Regardless of implementation point or technique, the report did back the sponsors of AB 1948 when it came to that 11 percent excise tax number, and that allowed them to restart the effort to lower pot taxes in California this session on the best footing they've seen yet.

Assemblyman Rob Bonta

Assembly members that included sponsor Rob Bonta (D-Alameda) and co-sponsors Ken Cooley (D-Rancho Cordova) and Tom Lackey (R-Palmdale) held a press conference last week announcing AB1948.

The illicit market continues to undercut businesses that are complying with state regulations and doing things the right way, Bonta said at the announcement. AB 1948 will temporarily reduce the tax burden on these licensed operators to attract customers to licensed businesses and help ensure the regulated market survives and thrives. Other states have shown that this approach actually increases overall tax revenue.

Bonta went on to speak on the LAO findings saying they delivered a clear message that the status quo is not working. I was pleased to see the report recommends eliminating the cultivation tax as we call for in AB 1948. We must lower and simplify the taxes on cannabis if the regulated cannabis industry in California is to survive, let alone thrive, he said.

Lackey reiterated just how wide the gap is becoming between legal marijuana and underground cannabis providers providers.The illicit market continues to annihilate the regulated market, Lackey said. We continue to witness the destruction of untested products in our communities. It's time we give the good players a chance to succeed because the health and safety of our communities depend on it. Lackey is also a joint author of AB 1948.

AB 1948 is also backed by State Treasurer Fiona Ma, who authored the bill alongside Assembly members Jones-Sawyer and Cooley. Ma also supported cannabis banking reforms for years before being elected to take charge of the state's coffers.

The state's leading marijuana reform organizations are in strong support of AB 1948 as the next step in providing the industry some relief. Josh Drayton of the California Cannabis Industry Association told L.A. Weekly this week's introduction of AB 1948 by Assembly member Bonta and its bipartisan coalition was absolutely critical to the survival of California's regulated cannabis industry.?

AB 1948 will provide the tax relief necessary for regulated operators to compete against a thriving illicit market that evades the financial obligations which drive up the cost of tested and regulated cannabis products, Drayton said. The cost disparity between illicit versus regulated products is a huge driver of the illicit market's success, and without addressing this cost barrier, consumers will remain at risk from unlicensed products.

Drayton believes this is the best shot yet to lower cannabis taxes in California following the implementation of Prop 64. Although this bill did not make it through the legislative process in 2019, we believe that there is a broader understanding of the challenges that face licensed operators, and we're thankful that both the legislature and the administration have signaled their willingness to address tax reform, he said.

California NORML also said AB 1948 will also make the state's industry more competitive against the underground pot economy thanks to lower prices for consumers. Ellen Komp, CANORML's deputy director, also pointed to the vape crisis as another thing pushing lawmakers to act.

AB 1948 will enable licensed cannabis retailers to lower their prices for cannabis consumers and patients in California, encouraging them to buy safe products that are tracked and tested, Komp told L.A. Weekly. It will also help licensed businesses compete with the underground market, ultimately resulting in a tax income increase for the state. With the illnesses and deaths caused by illicit vape products in California and elsewhere, there is an urgency to pass this bill this year.

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