California lawmakers say pot taxes must be cut to help an industry ‘on the brink’

California lawmakers on Friday revived a proposal to temporarily cut taxes on marijuana to boost a legal market that one official said is “on the brink of collapse,” drawing encouragement from Gov. Gavin Newsom as he seeks to overhaul state pot regulators.

The bill would cut the state excise tax on marijuana sales from 15% to 11% for three years while eliminating a cultivation tax for that period. Similar legislation has been shelved in the last two years, with Newsom saying he felt it was too soon after legalization to make changes to the law.

But the governor signaled last week that he might be changing his mind, proposing in his new state spending plan a shakeup of the agencies that regulate cannabis sales as well as a streamlining of the method of collecting taxes, and saying he is open to considering other measures to boost a legal industry created when California voters approved Proposition 64 in 2016.

“The governor’s office through its proposed budget has shown that it understands action needs to be taken,” said Assemblyman Rob Bonta (D-Alameda), a lead author of the new bill, who noted that an estimated 75% of marijuana sales in the state continue to come from the black market. “With these steps, we believe that we will be supporting the regulated marketplace for cannabis in California. It will also help reduce and shrink the unlicensed, illicit market.”

The tax cut was also supported by State Treasurer Fiona Ma and co-authored by three other legislators, including Republican Assemblyman Tom Lackey of Palmdale. He said Assembly Bill 1948 will “provide relief to an industry that’s clearly on the brink of collapse.”

California’s legal market has not grown as expected, a problem the cannabis industry and some state officials have attributed to factors including high taxes, bureaucratic red tape and the fact that three-quarters of California cities have banned pot shops.

Josh Drayton of the California Cannabis Industry Assn. said the new proposal “is absolutely critical to the survival of California’s regulated cannabis industry,” adding it is “necessary for regulated operators to compete against a thriving illicit market that evades the financial obligations which drive up the cost of tested and regulated cannabis products.”

Some supporters of Proposition 64 predicted a legal marijuana market in California would bring in $1 billion in annual tax revenue for the state, but the governor’s budget last week estimated only $479 million will be generated in the current fiscal year and $550 million in the budget year beginning July 1.

“I was a proponent of the initiative,” Newsom said last week. “We said it would take five to seven years to get close to that billion dollars. We are marching in that direction.”

Even so, Newsom’s new budget proposes combining licensing and enforcement at three state agencies under a new Department of Cannabis Control by July 2021.

Currently, the state Bureau of Cannabis Control licenses retailers, delivery firms and distributors and enforces the rules, while pot farms are licensed and regulated by the state Department of Food and Agriculture. Manufacturers of products including edible pot are overseen by the state Department of Public Health.

“Establishing a stand-alone department with dedicated enforcement will centralize and align critical regulatory functions to build a successful legal cannabis market, and create a single point of contact for cannabis licensees and local governments,” Newsom’s advisors wrote in the governor’s budget summary.

Details on how the agencies will be merged and operate will be released in the spring, Newsom said.

Lackey said he hopes streamlining licensing and oversight will improve lax enforcement against the illicit market, which he said has led some cities to prohibit pot shops.

Newsom has also proposed simplifying the tax structure by moving the point of collection for cannabis taxes from the final distributor to the first and the retail excise tax from distributor to retailer. He said such a plan wouldeliminate a need for the state to estimate an average mark-up rate on cannabis products to determine a wholesale tax rate that ensures the tax paid by the distributor is equal to 15% of gross receipts at retail. That process, which resulted in an increase to the tax rate on Jan. 1, has drawn criticism.

Bonta and Lackey noted that the governor also left the door open to additional tax reform, a position memorialized inNewsom’s budget: “The Administration, in consultation with the industry and stakeholders, will consider other changes to the existing cannabis tax structure, including the number of taxes and tax rates to simplify the system and to support a stronger, safer legal cannabis market,” the budget summary says.

The tax-reduction bill has also been bolstered by a new report by the state Legislative Analyst’s Office, which concluded the existing tax structure is flawed and recommended changes that could include the elimination of the cultivation tax.

California Cannabis Industry Assn. Executive Director Lindsay Robinson said the budget “reflects an understanding of our challenges, and furthermore provides solutions that will simplify tax collection, ease licensing, and eventually increase access to the regulated market.”

She said merging the three agencies “will assist in minimizing differing interpretations of the regulations,” while also boosting enforcement, “which is essential in battling against the illicit market while increasing consumer safety.”

The United Cannabis Business Assn., which represents many Los Angeles-based retailers, said the proposals represent “a turning of the tide” on the legal market.

“Since legalization, the California cannabis industry and its consumers have struggled to navigate an increasingly complex regulatory landscape — a situation that contributed to the growth of the illicit market and the current accessibility of untested products, as well as an increased cost of compliance to license holders,” said Board President Jerred Kiloh.

But the group said more work is needed.

“The Governor’s budget only lowers the burden of complexity, not the tax itself,” the association said in a statement last week. “In the coming months we’ll be working on identifying specific taxation numbers and processes behind this new structure — only then will we be able to determine the overall impact on the industry.”