California Pot Economy Just Inhaled Relief

Welcome to this week’s look at what’s happening in cannabis and psychedelics. My inbox is full of pitches about how to live your best summer with weed and CBD. More interesting, perhaps, is whether California’s legal cannabis industry will finally get a leg up on the state’s thriving black market.

What happens in California won’t stay in California

Legalizing marijuana was never a sure-fire economic experiment. But it wasn’t expected to lead to relief packages.

Last week, the world’s largest cannabis market was granted a generous package of tax cuts. If successful, the impact may be felt across the globe. That’s because California isn’t just the world’s biggest and oldest pot economy — its massive illicit marijuana market also has an outsize influence across the industry.

California’s law will wipe out a tax on marijuana cultivation, which brought in around 14% of total state-level taxes on marijuana, or around $166 million, in 2021, according to the state.

The aim is to help growers and retailers out from at least one layer of taxation, while balancing the needs of the state: California has earmarked revenue for youth and environmental programs and must also fund costs created by the industry, such as dealing with drugged drivers. Marijuana businesses, meanwhile, say they need help because they struggle to compete with cheaper illegal weed that isn’t taxed or screened for contaminants. Add in an oversupply of cannabis following last year’s bumper crop, and the economic climate is increasingly tough. Many small operators are expected to fail or consolidate.

“It’s one of the few windfalls we’ve gotten in the cannabis industry that has given operators here some hope,” Vince Ning, chief executive officer of San Francisco-based marijuana wholesaler Nabis, said of the relief package.

Amy O’Gorman Jenkins, founder of Precision Advocacy, a lobbying firm for the cannabis industry, called the old cultivation tax “an operational burden” because it had to be paid by cultivators before they could get revenue from the sale of their cannabis. They were charged even if the marijuana never sold.

The tax break will thus help legal cultivators — some of whom have been burning excess marijuana or selling it into the black market to avoid paying the onerous cultivation tax, Ning told me. Because the cultivation tax was based on weight, rather than the price of goods sold, cultivators were vulnerable to the recent declines in prices. That gave them an incentive to just dispose of product, instead of paying the required tax without knowing whether it would actually end up being sold.

The tax cuts will also filter through the entire cannabis industry by removing a cost that distributors and wholesalers like Nabis can pass on to the consumer, Ning said.

Other details of the relief package include tax breaks for employers who pay more than 150% of minimum wage, and $10,000 tax credits for the industry’s so-called social equity operators — minority groups that were hurt by disproportionate arrest rates for marijuana in the past. The industry now wants these groups to share in the profits of legalized sales. Social equity operators will also get a rebate on taxes they remit to the state, allowing them to keep 20% of it to reinvest into operations.

The cannabis industry engaged “aggressively” with legislators to win the final provisions, Jenkins said in a short video about the legislative victory. A prior proposal would have wiped out the cultivation tax but compensated for it by raising excise taxes within 18 months.

“We need more than 18 months to stabilize,” Jenkins said of the troubled industry. The final aid package gives the industry three years of leeway; it keeps marijuana’s excise tax at 15%, giving California the option to raise it on July 1, 2025.

Part of the bill’s logic is that by strengthening California’s legal market, it will dent the illegal one, which is estimated to be anywhere from two to three times as large. Legal pot sales in California are expected to bring in around $6.37 billion this year.

A blow to the black market would be a boon to cannabis operators nationwide, who compete not only with illegal weed in their own state, but with California product that’s trafficked across state borders. Much of the U.S. illegal market, which New Frontier Data estimates to be around $66 billion annually, is believed to come from California. In 2017, the state grew around five times more marijuana than was consumed in the state, and most of it was sold in other parts of the U.S., the Los Angeles Times has reported.

So efforts to bring the illegal crop into the legal market could help businesses everywhere, including big publicly traded multi-state operators. If the relief works, that is. The tax cuts aren’t the California cannabis market’s first aid package: Some local governments, like Long Beach, have already cut the industry a break with local tax changes. And a $100 million fund was earmarked for floundering businesses just over a year ago.

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