North Coast lawmaker joins call to ease tax burden for California cannabis industry

State Sen. Mike McGuire said Wednesday he plans to introduce legislation early next year to eliminate the state cultivation tax paid by cannabis growers, a favored target of the industry.

“We need to take a close look at the overall tax rate and whether it is impeding the overall growth of the cannabis market,” he said.

“The bottom line is this: Cultivation taxes are crushing small farmers throughout the North Coast,” McGuire said, adding: “Basing it off the weight doesn’t account for when the market collapses. It’s simply not sustainable.”

To reduce the financial burden on growers, the Healdsburg Democrat, who serves as assistant majority leader in the Senate, said he plans to seek abolition of the cultivation tax in exchange for a higher excise tax, which is imposed on point-of-sale-transactions.

McGuire plans to ask the Legislature’s Legal Counsel to see what’s allowable under state statute. He cautioned the state’s hands may be tied in eliminating the amount of cultivation tax.

Industry stakeholders shared their appreciation for McGuire’s plans, but some were skeptical that moving the tax from one point of collection to another would help.

Then, there’s the legality of it all.

“Any permanent reduction of taxes would have to go before the voters,” McGuire said, citing the regulations passed in California’s Proposition 64, which in 2016 legalized adult, recreational cannabis use statewide. The state subsequently set up a licensee and tax program that imposes obligations at every level of the supply chain from cultivation to sales and excise taxes.

The cultivation tax sparked renewed ire from the industry when the state announced plans to raise the rate next year from $9.65 to $10.08 per dry weighted ounce.

In the third, last-reported quarter, the growers generated $42.4 million out of the $322.3 million in total tax revenue collected from the industry; $168.9 million was from excise tax; and $110.9 million from sales, the California Department of Tax and Fee Administration reported.

McGuire’s proposal comes amid projections and concerns among cannabis stakeholders of a looming market collapse, as wholesale prices plummet to rates that hover around what some pay in taxes. The situation is prompting some to fear small growers will go out of business in a $3.1 billion legal industry the majority of Californians support. About a third of that annually goes into state coffers.

“We’re looking for more comprehensive tax reform,” California Cannabis Industry Association Executive Director Lindsay Robinson said in an interview.

The state advocacy group has warned about the health of a market flooded with product that drops the price point, with the added problem of not enough retailers to go around.

“We also need more access to retail across the state,” Robinson said, insisting “it’s within the state’s best interest” to maintain its legal licensees. “This is not just one rallying cry. The industry is at its breaking point of a potential collapse.”

Those alarm bells have sounded from the halls of Sacramento to the chambers of local government in the North Bay.

“We appreciate Senator McGuire taking action, but the tax burden is still there. Ultimately, cultivation should not be taxed in California. Until we lower the tax liability, the illicit market will continue to flourish,” said Joe Rogoway, an attorney who drafted resolutions that were delivered to the Sonoma County Board of Supervisors for the local Cannabis Business Association and Sonoma Valley Cannabis Enthusiasts.

The black market was valued at $8.7 billion a year, according to a 2019 Statista report.

In the meantime, Rogoway said many legal farms may go into default and drop their licenses with the state.

“The fundamental problem is, taxing the farmer creates an unworkable financial model,” he said. “We’re hearing from a lot of people they may not be able to weather the storm.”

Local government officials, including some in Sonoma County, have agreed to either revisit or outright revoke tax responsibility for cannabis businesses. San Francisco suspended its cannabis tax on Nov. 17.

Sonoma County taxes a dozen types of licensed growers from $1.12 to $12.65 per square foot depending on the category.

Rogoway said local cannabis firms are pushing for a restructuring of the local tax system.

“Any movement is better than no movement. And where we appreciate local officials willing to look at this, just in the context of the industry, it’s not treated well,” Rogoway said. “The methodology is flawed.”

Tiffany Devitt, chief of government affairs for CannaCraft, a large cannabis producer in Santa Rosa, contends “the bigger issue is the totality of the cannabis tax burden, which results in tested and regulated cannabis being two to three times more expensive than illicit weed.”

Devitt referred to McGuire’s shift as tax reform without tax relief.

“It won’t work. It’s the equivalent of rearranging deck chairs on the Titanic,” she said. “In order for the state of California to protect the emerging industry and fulfill Prop. 64 — which mandated the state to tax the growth and sale of marijuana in a way that drives out the illicit market — it’s going to have to lower the taxes.”

Terry Garrett, an economics consultant and former chief operating officer for the Mercy Wellness cannabis dispensary in Cotati, noted he predicted the industry would face a reckoning around 2020.

Garrett ran a report five years ago that sought to gauge how much of the industry would remain in the unregulated black market. He found that about a quarter of cannabis businesses surveyed signaled they would remain in the legal shadows until 2020, with an intent to join it later.

About 35% said they would split their divisions, with one leg legal, the other not. Thirty percent signaled they would operate legally, while 10% said they would never go into the licensed programs. Their reasons for staying out of government reach ranges from the complicated process to the costs.

“It’s still an underground industry,” Garrett said, noting how unfortunate it is for those who play by the rules. “This is the biggest plant in the state of California that has the potential for economic development.”

Can a tax shift as proposed by McGuire fix the situation?

“The industry appreciates the gesture, but it’s like putting a tourniquet on a hand when the rest of the body is bleeding,” Garrett said.