When it comes to California's cannabis tax system, the nonpartisan Legislative Analyst's Office just sent a crystal clear message to the state Legislature: You're doing it all wrong.
In a long-awaited bombshell report released last week, the LAO recommended a major overhaul of the current system, which it described as overly complex and burdensome. But the report also warned that revisions to the state tax code alone will not make regulated cannabis cheaper than what's available on the illicit market.
"Under current market conditions, changes in the state tax rate likely would not make legal cannabis less expensive than illicit cannabis," the report states. "Even if the state eliminated its cannabis taxes entirely, other costs — such as regulatory compliance costs and local taxes — likely would keep legal cannabis prices higher than illicit market prices."
But the LAO — which was tasked with assessing how cannabis taxes could be tweaked to undercut the illicit market, while also discouraging youth consumption and generating enough revenue to adequately fund the state's oversight of the legal industry — identified a few things it says could make a big impact.
Specifically, the report recommends doing away with the weight-based cultivation tax, potentially replacing the 15 percent excise tax with a levy based on product potency and simplifying tax collection by having all taxes collected at the point of sale. (The current system has taxes imposed at virtually all steps of production, from cultivation to checkout.) A potency-based tax, the report suggests, could impose $0.006 to $0.009 per milligram of THC. If the goal is competing with the illicit market, the report advises, lawmakers should impose a tax on the lower end, but if the priority is keeping cannabis out of kids' hands, it says, they should go with the higher levy to bring in more money for enforcement.
And that's the crux of the problem. In making its recommendations, the LAO made clear it was trying to balance somewhat competing interests — undercutting the price point of the illicit market and making sure the state brings in enough revenue to fund enforcement and oversight. Those are essentially competing interests.
The bottom line is that someone who trespasses onto a property, steals water from a nearby stream and wildly sprays pesticides will be able to sell their product cheaper than their counterparts who pay property taxes, have onsite water storage and grow a product good enough to pass the state's myriad testing requirements. Even a tax-free system isn't going to shift that paradigm, though it would certainly make the price points a bit more competitive.
State Assemblymember Tom Lackey made the point to Marijuana Business Daily that all the oversight and enforcement funds in the world won't matter if there's a plethora of cannabis available on the illicit market. But the flip side of that argument is that the vast majority of the cannabis produced in California is grown illegally and that's unlikely to change without a well-funded effort to go after illegal farms.
From a Humboldt County-centric perspective, it seems clear a simplified tax structure that lowers the burden on cultivators is preferable. The bottom line is that, while 2019 was reportedly better than the first of legalization, farms continue to struggle to make ends meet and tax reform would help, especially considering taxes are already slated to increase in 2020.
On a related note, earlier this month, state regulators raided dozens of unlicensed cannabis shops in Los Angeles, the state's first large-scale crackdown of illicit storefronts to date. Investigators served search warrants on two dozen shops and reported seizing $8.8 million in products — including nearly 10,000 vape pens, according to a report in the Los Angeles Times.
If the state really wants to rein in the illicit market, actions like these seem the logical place to start. After all, while it's hard if not impossible to turn the tide of cannabis flowing across state lines to more lucrative markets, regulators should be able to keep unlicensed shops from opening up across the street from legal ones.
Thadeus Greenson is the Journal's news editor and prefers he/him pronouns. Reach him at 442-1400, extension 321, or email@example.com. Follow him on Twitter @thadeusgreenson.