A bill introduced at the end of January could give legal cannabis businesses a temporary tax reduction to help the legal industry combat its illegal counterparts.
Sponsored by assembly members Rob Bonta, Reginald Jones-Sawyer and Ken Cooley, the Temporary Cannabis Tax Reduction Bill, or Assembly Bill 286, would only reduce the current 15 percent tax by four to 11 percent for three years through June 1, 2022.
Many say that this is one of many necessary solutions to fix a profitable but struggling industry.
“The number one benefit that [legislatures are] talking about is to make the licit market competitive with the illicit market,” Professor of Sociology and Online Criminology Nick Athey said.
“When a licit market has to put a lot of funds initially to get the startup for their companies, it can be quite expensive, and to then begin taxing them initially before they start generating revenue is almost setting them up for failure.”
The taxation of recreational cannabis has proven to be extremely lucrative in recent years. In 2018, Washington and Colorado have been able to rake in 160 and 267 million in tax revenue from legal cannabis, respectively – tax revenue that helps pay for Medicaid or the construction of new schools.
“It’s more tax income to local and state government that they can devote to whatever funding needs they have,” said John Schroyer, senior reporter for Marijuana Business Daily.
However, not every state has had the same seamless transition into legalization. States like Oregon, which do not restrict the number of growers coming into the industry, see massive deflation in cannabis prices, which in turn cuts out the illicit market.
However, this also can have a negative effect on commercial business.
“Because of the low taxes and the high amount that you can produce, it’s incredibly difficult to remain competitive. There’s a fairness issue at the commercial market level, but the advantage is that it’s cutting out the illicit market,” Athey said.
“So it’s kind of a two-pronged thing: you have to have good regulation initially, but then you also have to make the tax structure competitive so that companies don’t want to leave to go to other states.”
Although we have seen the positive potential outcomes of legalizing recreational cannabis, California’s situation is unique in that it has had such a long standing history with the illicit market.
The typical way to “pickup” cannabis is to go to a local storefront dispensary, however there are also many different delivery services. Many of these services are also illicit, and do not actually have the licensing to legally sell cannabis.
“Because they don’t have a physical geographical location, they are not really accountable to anybody and there tend to be a lot more illicit players in that market,” Athey said.
“So purely by creating a dispensary and a delivery system, and then not really regulating either very well, we as a governing body in California are allowing the illicit market to flourish regardless of what we do with taxes.”
Another concern that is shared among experts is where the illicit market will go once it is pushed out of the industry by legislators.
“There’s a likelihood that people who currently operate in the gray market of marijuana, as soon as that price-per-gram drops where they can’t compete with the legal market, they’re going to begin switching over and start selling things like heroin, cocaine and amphetamines,” Athey said.
“It’s going to make it easier for the commercial market to flourish but is also going to result in a criminal displacement. We’re displacing them from marijuana to harder drugs.”
Colorado and Washington were the first states to legalize recreational marijuana in 2012. California was the first state to legalize medical marijuana in 1996, but attempting to put a system in place has been a disjointed process.
“There was never a statewide regulatory system put in place for businesses to get business permits from the state, or any ways for medical marijuana businesses to pay taxes on what they sold,” Schroyer said.
“Everything was left to the cities and counties, so it was this real patchwork of rules and regulations for almost 20 years.So then the legislature had to go back to work to set up regulatory systems for both medical and recreational marijuana businesses and it became even more convoluted and complex.”
Another problem for the legal business is a lack of legalization in many parts of California. Thus, much of the population is introduced to the “black market” first, as opposed to the legal, licit market.
“Part of the problem is that roughly two-thirds of the cities and counties in California still have complete prohibition for all types of marijuana companies, which means that two-thirds of the state is still wide open for the black market,” Schroyer said. “The black market doesn’t give a s*** about business licensing or paying taxes or any of those things, so it essentially creates this population that is wide open to the black market but closed to the legal market.”
Washington state was able to simplify its tax structure in 2015, and in turn saw an increase from 13 million to 33 million from June 2015 to April 2017, despite its lowered tax.
The increased income, despite reduced taxation, is one of the main selling points of the bill.
However, it is still a hard sell for the politicians in Sacramento, Schroyer said.
“Just from a political standpoint, it’s probably not an easy argument for politicians to make, who are gonna have to justify this to their constituents in terms of why they’re supporting a tax reduction on marijuana businesses,” Schroyer said.
“[It] is not the most popular political standpoint to take, so there are going to be a lot of politicians who are very hesitant to support this.”
An eerily similar bill, AB 3157, that also called for the same four percent reduction was introduced on Feb. 16, 2018, but quickly died without much recognition.
Despite its unclear future, many agree that something has to be done; this bill is only the first step.
“This tax reduction piece is only one part of a much much broader policy discussion,” Shroyer said.
Joey Matsuzawa can be reached at email@example.com.