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Tax cuts leave California cannabis businesses wanting much more

California’s licensed cannabis businesses are getting a tax cut — and they are disappointed about it.

Democratic Gov. Gavin Newsom raised hopes in the cannabis world this year when he called for an overhaul of the state’s pot taxes. But the cuts that cannabis-friendly lawmakers managed to eke out were modest — far short of the boost they hoped to deliver to legal weed businesses getting outcompeted at every turn by the booming underground economy. Many see it as a missed opportunity.

“We’re going to continue to fuel the illicit market until we acknowledge that there’s over regulation, over taxation of something that we claim we want to see succeed, a legal cannabis market,” said state Sen. Scott Wiener (D-San Francisco) in a floor speech critiquing the tax-reform bill.

Frustrations have been building steadily since voters legalized recreational cannabis in 2016, with Newsom’s backing. Rather than watching businesses rush to enter the market, the nascent legal industry has languished behind an expansive network of off-the-books pot shops and tucked-away farms that fuel a multi-billion-dollar enterprise.

For licensed operations trying to survive, the reason is simple: The taxes are too high.

The legislation Newsom signed into law last month won’t lessen the tax burden for many businesses, at least for very long. It eliminates a weight-based tax for cannabis growers, but leaves a 15 percent tax on retail sales — and gives state officials the authority to eventually raise retail taxes to make up for the lost cultivation revenue.

“This is actually a pretty good landing spot, knowing the politics, but does it solve the industry’s problems? Hell no, it doesn’t,” said Adam Spiker, executive director of Southern California Coalition, a cannabis trade association.

Uprooting an entrenched illicit cannabis market continues to be a problem nationwide, despite three-quarters of states having legalized either recreational or medical sales. Underground purchases were worth $70 billion in 2021, compared to $26.5 billion for the legal industry, according to estimates from New Frontier Data.

Nowhere is the problem more pervasive than in California, where the unlicensed market continues to not only exist, but thrive, because of a unique confluence of factors. Many of the businesses that operate without licenses today were part of a decades-old medical market that flourished under relaxed medical regulations voters approved through Proposition 215 in 1996, and still use that network to move products. And more than 60 percent of cities and counties still ban all retail marijuana businesses, according to data from the California Department of Cannabis Control, creating wide swaths of the state where it’s difficult for consumers to access legal weed.

Roughly 1,000 brick-and-mortar pot shops serve the state’s legal market, along with 481 permitted retail delivery services. That’s nowhere close to the 3,000 unlicensed retailers and delivery services that were estimated to operate in California as of 2020, according to a market analysis by Marijuana Business Daily.

Licensed businesses also say the extra costs tacked onto their products due to strict testing and packaging regulations make it hard to compete with their underground competitors, who offer nearly identical items at steep discounts.

California’s cannabis tax-reform law came out of lengthy negotiations between the industry, labor unions and a coalition of healthcare, youth advocacy and environmental groups that are guaranteed a portion of cannabis revenues — and fervently oppose any tax cuts that could shrink that pot.

It includes a handful of new tax credits that reward weed businesses with strong labor practices and operations in so-called “social equity” programs, which are designed to support communities disproportionately harmed by drug criminalization. The changes also simplify a convoluted system for paying excise taxes, which industry leaders say will give shop owners more freedom to charge what they see fit for individual items.

That a deal was reached despite so many moving parts was hailed as a tactical victory by cannabis industry groups. But to some, the win felt hollow.

To Read The Rest Of This Article By Alexander Nieves on Politico

Published: July 10, 2022

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