With an historic state budget surplus of $97 billion in hand, California Governor Gavin Newsom on Friday released a revised 2022-23 state budget proposal that included several changes to the state’s cannabis tax and regulatory regime that are meant to prop up California’s struggling legal industry while undermining its resilient black market. Among the proposed changes is the elimination of the cultivation tax on July 1, but the 15 percent excise tax rate imposed on retail purchasers will remain in place, however it will now be collected and remitted by retailers instead of distributors.
The California’s Department of Cannabis Control (DCC) issued a statement outlining the proposed changes, and added of the effort, “Governor Newsom delivered on his commitment to help simplify the tax structure by moving forward a proposal that, if approved by the Legislature, will remove unnecessary administrative burdens and costs, temporarily reduce the tax rate to support shifting consumers to the legal market, and stabilize the cannabis market. We have heard from many of you who have said that the current cannabis tax framework is overly complex. We know that current tax policies disproportionately burden cannabis farmers and small businesses and create instability throughout the supply chain, ultimately undermining the societal benefits of a taxed and regulated market.”
Some of the changes include:
Setting the cultivation tax rate at zero beginning July 1, 2022.
Shifting the point of collection and remittance for excise tax from distribution to retail on January 1, 2023, maintaining a 15 percent excise tax rate.
Setting Allocation 3 funding for youth education/intervention/treatment, environmental restoration, and state and local law enforcement programs at a baseline of $670 million annually for three years. Up to $150 million one-time General Fund is available as needed through 2025-26 to back-fill Allocation 3 funding, along with the authority to increase the excise tax rate through 2024-25 if tax revenues fall below the baseline for Allocation 3.
Strengthening tax enforcement policies to increase tax compliance and collection and reduce unfair competition.
“In addition,” the DCC continued, “the Governor’s budget proposal includes a one-time allocation of $20.5 million to help expand access to legal retail throughout California. The grant program will assist cities and counties that do not currently license storefront or delivery-only cannabis retailers. If approved, the funds will aid localities with the development and implementation of local retail licensing programs and helping more of California’s existing consumers gain access to regulated and tested products through licensed and legal retailers.”
At a press conference held to announce the release of the revised budget, Gov. Newsom spoke at length in response to a question about the thought process behind the proposed changes to cannabis law:
“I’m very proud of the team that is leading this effort…that has been long trying to champion these reforms, working with many members of legislature – Senator Bradford included – and the equity components of this, working with local governments to address some of the vagaries as they relate to the lack of support that still exists with municipalities that are not affording retail operations or distribution or delivery, issues that presented themselves. We’re looking to provide additional grants beyond what we’ve laid out to local governments. You can see a slide here – $21 million specifically to expand retail operations and to address some of those issues, all with an eye (to) answering your question about the thinking of addressing the persistent issue that is exactly what we anticipated would be a persistent issue, and that’s dealing with the black market, going after the illegal growers and illegal operators, trying to level set, trying to be flexible in terms of the cost pressures related to the current tax structure and the lack thereof in the black market. And so that’s where we’ve gone, working very closely with legislative leaders, and we’ve made tremendous progress.
“Now, that said, we haven’t finalized any of that, so I want to be careful not to disrupt that progress, but we’re seeing a lot of progress in this space and a lot of improvements, including a reflection of that progress, and acknowledgement that if you do lower that cultivation tax in particular, that there may be a temporary reduction in taxes, and we want to provide backfill for the three key categories of beneficiaries – as it relates to children, youth and families, as it relates to environment, and as it relates to law enforcement – to backfill their reduction of tax revenue that may occur as well, and that’s reflected in that $150 million that we’re proposing to put in the budget in that space.
“All of this is constant and never ending in terms of the need to move, to understand [how] to meet changing criteria and conditions and address the intended and unintended consequences. So, this is the beginning of a process from my humble perspective in terms of my thinking. This will be a multiyear process to get that black market on the retreat…and to get the retail and responsible adult use market on steady ground.”
The cannabis retail access grant proposal is on page 138 of the Governor’s revised budget proposal located here.
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