State might consider temporary cut in marijuana taxes

Marijuana taxes in California would drop substantially for three years under an Assembly bill introduced Thursday.

The legislation would cut the marijuana sales tax rate from 15 percent to 11 percent, and suspend all cultivation taxes, until June 2021.

Assemblymen Tom Lackey, R-Palmdale, and Rob Bonta, D-Oakland, said they authored the bill as a way to reduce the price gap between licensed cannabis businesses and black market sources while giving the regulated market a chance to take hold.

“We need to give legal businesses some temporary tax relief so they do not continue to be undercut by the black market,” Lackey said in a statement.

Cannabis industry workers and consumers have been clamoring for the cuts, insisting that sticker shock since taxes kicked in Jan. 1 is driving some shoppers back to the cheaper black market.

“Reducing this gap is critical to making the legal market more competitive against the illicit market and more attractive for consumers,” said Beau Whitney, senior economist at New Frontier Data, which tracks cannabis industry finances.

Under rates approved by voters in November 2016 with marijuana legalization measure Proposition 64, all cannabis legally sold in California now comes with a 15 percent excise tax. Recreational cannabis shoppers also pay state sales tax, which typically runs between 8 and 10 percent. And, on top of that, most cities that allow marijuana stores have also tacked on local taxes, which can range from 5 to 15 percent.

That means medical marijuana consumers are generally paying at least 20 percent tax on every purchase, and recreational consumers are paying as much as 40 percent.

Marijuana cultivators are also paying taxes that play into how much consumers pay even though they aren’t directly listed on sales receipts. The rate set by Prop. 64 is $9.25 per ounce of cannabis flower, $2.75 per ounce of cannabis leaf and $1.29 per ounce of fresh cannabis plant.

Cultivators have been particularly slow to transition to the legal market. Fewer than 1 percent of the state’s 68,120 cannabis growers were licensed by mid-February, according to a report from the industry trade group California Growers Association.

A receipt from a recent purchase at a licensed marijuana shop in Los Angeles. (Courtesy of Alhambra resident Igor)

If the cultivation tax is temporarily eliminated, and the sales tax drops to 11 percent, New Frontier Data estimates consumers would see a 9 percent drop in prices at the register.

Keith Humphreys, a psychiatry professor at Stanford University who studies marijuana policy, has urged the state not to cut taxes, insisting that prices soon will drop, a shift that also will reduce tax revenue. But if the state decides it needs to adjust tax rates, Humphreys has said he wants the drop to be temporary, since he believes it’s hard to raise taxes once you’ve lowered them.

The tax drops in Assembly Bill 3157 would automatically sunset in June 2021 unless further action is taken.

Dropping the taxes could put a significant dent in how much revenue California will see from its emerging legal marijuana industry over the next three years.

Under current rates, the Legislative Analyst’s Office predicted California could see $1 billion a year in revenue from the marijuana excise tax. And Gov. Jerry Brown’s preliminary budget for the 2018-19 fiscal year anticipated a windfall of $643 million.

That revenue goes first to pay the state’s costs for running its rapidly growing marijuana regulation program. Then the funds are dedicated to cannabis research, addiction prevention programs, law enforcement, environmental clean-up efforts and more.

Lackey’s office pointed out that the state of Washington actually saw an increase in cannabis-related tax revenue after it cut the state tax rate in 2015. A statement from his office said the lower tax helped businesses by bringing more customers to the legal side of the cannabis market.

Assembly Bill 3157 is also supported by Assemblymembers Ken Cooley, D-Sacramento; Reggie Jones-Sawyer Sr., D-Los Angeles; and Jim Wood, D-Healdsburg.

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