The latest California budget submitted by Gov. Gavin Newsom could go a long way in fixing the state's ailing recreational marijuana industry by fully eliminating an oppressive cultivation tax.
Newsom's May revisions to the 2022–23 fiscal year budget call for some significant statutory changes to the state's cannabis tax system. The biggest change would be zeroing out the cultivation taxes beginning in July. The excise tax of 15 percent would remain intact.
When Californians voted to legalize recreational marijuana cultivation and sales back in 2016, the industry ended up saddled with state and local taxes that make it inordinately costly to attempt to sell or buy cannabis legally. As a result, the black market for marijuana still dominates sales in a state where it's legal to buy it. Industry analysts estimate about $8 billion in black market marijuana sales annually in California—double the amount of marijuana purchased through licensed dispensaries.
The cultivation tax has been consistently eyed by industry analysts as a problem. This particular tax is unique among agricultural products in California, and due to the legislation passed in 2017 to establish tax authorities, it's regularly adjusted for inflation. As a result, cultivation tax rates actually increased at the start of 2022 despite this big black market problem.
The high cost of attempting to cultivate marijuana has both given cannabis farmers second thoughts and has fostered a whole new drug war as state and local law enforcement officers raid illegal grow operations out in the rural and uninhabited parts of the state. Legislators even passed a new law adding more potential criminal penalties for those arrested for "aiding and abetting" any unlicensed dealers.
The entire history of the drug war shows that increased enforcement and punishment isn't the solution. A report from Reason Foundation released earlier in May estimated that reducing some of California's excessively high marijuana taxes could result in higher legal sales and ultimately more revenue for the state. Geoffrey Lawrence, Reason Foundation's managing director of drug policy, estimates that California may see a 123 percent increase in marijuana revenue by 2024 simply by eliminating the cultivation tax.
"California's state and local taxes on legal cannabis can be as high as $90 per ounce, or $1,441 per pound, dramatically higher than other states," Lawrence wrote. "For example, taxes on legal marijuana average $340 per pound in Oregon and $526 a pound in Colorado. Those lower taxes make legal cannabis products more competitive with black market products in those states. As a result, Oregonians spend 378% more per capita on legal cannabis and Coloradoans spend 335% more per capita on cannabis than Californians spend per capita."
It's good news that Newsom is proposing eliminating the cultivation tax. He may be doing it in the hopes that the state will make more money, but California residents will also benefit from cheaper legal options. And if this makes it easier for people to grow cannabis legally, there will hopefully be fewer raids and enforcement operations in the future.