Can Tax Breaks Quash California’s Illegal Cannabis Market?

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The California Treasurer and lawmakers announced a bill Monday that would give legal cannabis businesses a tax break in an attempt to support legal businesses while suppressing the black market.

Specifically, the bill would temporarily cut the state’s cannabis excise tax by 4%, from 15% to 11%, and also entirely suspend the cultivation tax through 2022. California Treasurer Fiona Ma said at the Capitol Hill press conference yesterday that she wants to help legal cannabis business owners “thrive.”

All legal cannabis operators would be eligible and the bill would take effect immediately.

The goal of the bill is to reduce the financial burdens facing the legal, above-board businesses, and therefore suppress the black market so it competes less with the legal market. (If we need to state the obvious: illicit cannabis businesses aren’t paying taxes of any kind or fielding “compliance costs” like license fees.)

The state brought in less cannabis-related tax revenue last year than expected; in the first six months alone, California was about $100 million under projections “largely due to the exorbitant taxes placed on the industry coupled with very limited access to banking,” the treasurer’s office noted in a release.

“This is just a little bit of a tax holiday to support the legal market,” said Democratic Assemblyman Ken Cooley said from the podium at the news conference.

Reginald Jones-Sawyer, an assemblymember that represents South Los Angeles, said his region has about 170 licensed cannabis business, compared to about 1,700 illegal black market that are competing with the legal ones, reiterating that lawmakers “need to be actively helping the 170.”

“The Al Capone’s didn’t stop overnight,” Jones-Sawyer said. “Ultimately, we need to suppress the black market until it completely goes away.”

Pat Oglesby, founder of the Center for New Revenue, a tax policy nonprofit, pushed back on the idea that taxes would do much to shrink the illicit market in California.

“Every industry wants a tax cut. The cannabis industry is no exception. Sure, the illegal market hasn’t disappeared overnight. But taxes aren’t the culprit,” Oglesby told Cannabis Wire. “The main reason for the continuing strength of the illegal market is the absence of licenses and sellers who can provide product to consumers. Applicants who want licenses can’t get them.  Legal product is in short supply.”

Oglesby added that he walked by MedMen in Venice Beach earlier this week and noted that “they were swamped.”
“Another huge reason for the strength of the illegal market is law enforcement, which has been very weak so far as it catches up. A tax cut would make the industry richer, but it’s not the cure for the illegal market,” Oglesby said.

The group of lawmakers speaking Monday was asked by a reporter how much of an issue the cash nature of the cannabis industry remains for regulators and cannabis business owners, and whether they had a banking solution.

“It’s hard to address the banking issue without assistance from the federal government,” Assemblymember Rob Bonta said. “It’s a tricky question in the state of CA,” adding that the federal government has been “irresponsible.”

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