Modest Tax Relief Comes to California's Cannabis Growers

Unfortunately, so do more regulations and potential fines.

One of California's many oppressive taxes on the cannabis industry has been laid to rest. Gov. Gavin Newsom has signed into law A.B. 195, which eliminates the state's cultivation tax.

California's cultivation tax, unique among the states that have legalized marijuana sales, forced growers to pay the state for each ounce of cannabis grown. This tax was separate from the state's 15 percent excise tax and state and local sales taxes.

Because the cultivation tax rate was automatically indexed to inflation, it had actually been increasing thanks to the state of the economy. Anybody attempting to legally grow marijuana shouldered a heavy tax burden, which then flowed downstream to consumers, many of whom realized it was cheaper to continue purchasing marijuana on the black market. The end result: two-thirds of marijuana purchases in the Golden State take place through unlicensed vendors. Because it's so expensive to grow legally, illegal grow operations abound within the state, leading to more police raids, arrests, and prosecutions, not to mention corrupt practices among local governments who have the power to pick and choose which businesses can open up shop legally.

Elimination of the cultivation tax was high on the list of possible solutions to discourage unlicensed grow operations and bring retail prices down. A study from the Reason Foundation (which publishes this website) calculated that the tax burden on legal cannabis companies in California could reach as high as $1,441 a pound, compared to averages of $340 per pound in Oregon and $526 a pound in Colorado.

Lawmakers and Newsom agreed and A.B. 195 ended the cultivation tax experiment with the start of July. Geoffrey Lawrence, managing director of drug policy at the Reason Foundation, sees that part of the bill as a win for both growers and consumers.

"The illicit market has been propped up by a tax-induced price disparity between legal and illegal cannabis products and by a dearth of legal cannabis retailers across large geographic regions of the state," Lawrence said in written statement. "Assembly Bill 195 addresses both of these issues by eliminating the wholesale cultivation tax and providing additional incentives for local governments to license legal retailers. Analysis by the Reason Foundation shows this tax change will induce more transactions on the legal market and result in the state collecting more than double its current amount of cannabis tax revenues within two years despite elimination of the wholesale tax. Both of these major policy shifts were recommendations made by Reason."

More legal businesses are definitely coming on line, even if it has taken years to happen. Hirsh Jain, vice chair of the California Cannabis Chamber of Commerce, noted on June 29 a large increase in dispensary license approvals last month by the state's Department of Cannabis Control. The agency has approved 90 new licenses across the state just in June. That works out to 8 percent of all state licenses approved in just 30 days.

Unfortunately, California seems unable to implement good ideas without tossing in some bad ones. A.B. 195 also includes additional enforcement mechanisms and penalties, like a new fine of $10,000 per day for any property owner knowingly providing space for an unlicensed cannabis business.

A.B. 195 also bends the knee to the state's labor unions by reducing the threshold from 20 to 10 employees to require that aspiring licensees enter into a labor peace agreement with a qualifying labor organization. A labor peace agreement is a deal between a business and a labor union that the business will not oppose a unionization effort and the union will not encourage strikes or work stoppages. Making it a mandatory requirement in order to get a license essentially gives labor unions a type of veto power over who can and can't operate a marijuana business. These agreements also, by their nature, require both sides to waive certain rights under the federal National Labor Relations Act. Lawrence argues that this labor agreement mandate is unconstitutional.

"These requirements are patently unconstitutional because the National Labor Relations Act reserves to the federal National Labor Relations Board the exclusive authority to regulate private-sector labor relations," Lawrence says. "The U.S. Supreme Court has been clear in adjudication that state and local rules requiring a labor peace agreement as a condition of licensure run afoul of this exclusive jurisdiction and that state and local governments are bound by the Supremacy Clause to the U.S. Constitution."

"While AB 195 represents two giant leaps forward for California cannabis policy, it also takes one step back in terms of its unlawful requirements forcing employers to enter labor peace agreements."