High Cost

Cannabis insiders focus on 2021 after the past year failed to bring lower taxes

As 2020 crawls to a close, the California pot industry looks back, with relief and chagrin, at a year that was supposed to be filled with big strides, but was instead filled with relatively small wins.

There is industry relief, because the state deemed pot an essential business and allowed it to operate despite the pandemic lockdowns. There is chagrin, because the state government, stymied by the pandemic, didn’t address lowering taxes, easing regulations or consolidating the three agencies that govern the state’s pot industry into one.

But now, as vaccines finally ship, industry insiders hope the state will act, quickly, in the new year. Of course, “quickly” means something different to the California Legislature than it does to the rest of us, and it will likely take the full year to get meaningful reform enacted.

In January, Gov. Gavin Newsom’s proposed budget aimed to consolidate the three state agencies into a single entity, the Bureau of Cannabis Control. At the same time, he signaled his willingness to negotiate a substantial decrease in the immense cannabis-tax burden. Everyone expects—and relies on the hope—that he’ll do the same again on Jan. 20, when he releases the new year’s proposed budget.

“It’s important that it happen now,” said Amy Jenkins, a lobbyist with the California Cannabis Industry Association, during an online confab last week for the Spark Sessions podcast, sponsored by IKNK Brands.

All year, the reforms were talked about “behind the scenes” among industry players, labor leaders and groups like the California League of Cities, legislators and regulators, she said. Getting the reforms passed won’t be easy, but the pieces are more aligned than they were this time last year, when everybody assumed 2020 would be the year that the California pot business would finally be enabled to thrive.

Today there are three cannabis industry licensing agencies: one for retailers, distributors and testing labs; another for growers; and the third for manufacturers. Splitting the duties among those agencies has led to mass confusion and enormous costs for the industry.

Jenkins is most confident that agency consolidation will happen this year. The framework for it should be finalized by July 1, after which the consolidation itself will roll out in phases that might take several years to complete, she estimated.

The tax issue is more vexing. Most observers agree that the 15 percent excise tax on cannabis should be lowered, but few—even within the industry—agree on how big the cuts should be.

Tax revenue was one of the main selling points behind the push to legalize cannabis for adult use via 2016’s Proposition 64. That led to not only the state opting for a high tax—which is assessed on top of the normal sales tax—but also to local governments imposing their own, often large, duties on pot sales. A cultivation tax is also assessed in the earliest stages of the supply chain, and those costs are ultimately borne by consumers.

This has—many would say predictably—led consumers toward the illicit market, crimping pot businesses that also face tight margins or even outright losses mainly due to the tax burden.

The most likely outcome in Sacramento will be the elimination of the cultivation tax, or at least a substantial cut to it. The main fights will be over the excise tax.

The conundrum is that regulating the cannabis industry is expensive and tax revenue is needed to finance it. There is a “sweet spot,” that would create just the right balance of generating enough to regulate the industry without driving away customers, but nobody can agree on what it is.

Still, “cautious optimism” seems to be the reigning feeling going into 2021.

“We are going into one of the most exciting and transformative years for cannabis,” Jenkins said. But only “if we can come together on some major policy issues.”

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