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'Taxes in California are insane for cannabis': Cannabis business owners call for change

Cannabis business owners in California say high taxes and burdensome regulations are not only killing their profits, but causing the illegal market to thrive.

SACRAMENTO, Calif. — California’s legal recreational cannabis market has been in business now for more than four years, yet some of its proponents’ original selling points to voters are not coming to fruition.

In short, many stakeholders say high taxes are stifling profits, fueling a rise in crime, and holding back equity efforts.

California has allowed medicinal cannabis since the mid-90s, but the legal recreational cannabis market launched at the start of 2018 after California voters approved Proposition 64 in 2016.

Back then, Prop 64 -- also known as the Control, Regulate, and Tax Adult Use of Marijuana Act -- was sold as a way to bring money into the state by taxing a product people were already buying. 

Proponents said, as a result, it would lower demand for the illegal market and therefore reduce crime. It would increase the quality and safety of the product by setting and enforcing standards. 

Prop 64 also promised to right some of the wrongs of the War on Drugs, which disproportionately hurt communities of color, including jail time for low-level, non-violent drug offenses.

RELATED: California’s next cannabis battle may be coming to a city near you

So, 4.5 years now into the legal market, how is Prop 64 living up to all those promises? People in the industry tell ABC10 red tape and high taxes are hurting business and ultimately encouraging crime.

PROMISE: PROP 64 WILL HELP MAKE AMENDS FOR THE WAR ON DRUGS

“It's no secret that the War on Drugs targeted, you know, Black communities, communities of color. We were arrested at disproportionate rates and, you know, we suffered the most,” said Maisha Bahati, CEO of Crystal Nugs, a Black-owned, women-owned cannabis delivery business with plans to open a storefront dispensary in Sacramento early next year.

She participated in Sacramento’s Cannabis Opportunity Reinvestment and Equity – or CORE - Program, which she says helped her launch her business.

“For someone who doesn't come from money, we come from these underserved communities, it’s a lot harder for us,” said Bahati. “But there are programs that are kind of opening up to kind of get us in the door, so I definitely am happy that more of us are trying to get in the industry.”

Josh Veal is CEO of Lumpy’s Flowers in Sacramento, which holds cannabis cultivation and distribution licenses.

“I think that our CORE program in Sacramento is leaps and bounds ahead of most,” said Veal. “I'm someone that was in the industry that got a felony for cultivation. And, yes, I deserve an avenue to getting a license because I was in the industry beforehand; I was directly impacted.”

He applauds Sacramento’s CORE Program and the part of Prop 64 which allows people with previous cannabis-related convictions to reduce or even expunge their criminal record, but he says taxes and regulations – even with the help of equity programs – are making it nearly impossible to enter the market.

“Since (the) legal (market launched), with the taxes and everything the way it is - and regulations and building and doing all the building inspections and the building permits and all that - I would say now, if you were to start today-- don't,” Veal said frankly. “And I don't think you could, to be honest with you. I think to enter the space now, you would need no less than a million dollars no matter what section you go into…sales, distribution, retail, cultivation…It's a very, very tough industry to break into.”

RELATED: 420 Day in California: What's next for the cannabis industry

In the case of Bahati, who said she does not have any previous cannabis-related convictions, the legal market that allowed her to start her small business is the very thing now hurting it.

“The taxes in California are insane for cannabis,” she said.

Between state and local taxes, Bahati said she’s paying a combined rate of more than 35%.

“Everything is taxed. Everything is overpriced,” she said. “It does open the door for the illegal market to still thrive.”

PROMISE: PROP 64 WILL REDUCE THE DEMAND FOR THE ILLEGAL MARKET AND THEREFORE CRIME

Alameda County District Attorney Nancy O’Malley agrees.

“The illegal market was and continues to be swathed in criminal activity,” she said.

At a virtual news conference earlier this year, O’Malley joined people from across the state and across cannabis-related industries calling for change to how the legal market is taxed and regulated.

“It's much cheaper to sell on the black market. It's much cheaper than having to pay taxes. It's much cheaper than hiring a skilled laborer that can both work in the cultivation as well as in the stores, and the profit margin for the illegal sellers and the illegal operators is tremendously higher than that of those who are working in the legal environment,” said O’Malley. “The cost of production is less because the illegal market growers are not following the health and safety regulations that are required for legal cannabis industry.”

Adding to the problem, stakeholders say, is Prop 64 giving local governments the choice to opt out of allowing cannabis businesses to exist within their respective jurisdictions. The California Department of Cannabis Control says more than half of cities and counties in the state have chosen to do just that. The department recently launched this tool for people to see where cannabis businesses are allowed and what type.

RELATED: Could Sacramento be the next destination for cannabis lounges? City leaders are discussing a proposal

The concern is that a lack of legal retailers in an area can leave a vacuum, filled by the untaxed and unregulated illegal market.

PROMISE: PROP 64 WILL BRING REVENUE TO THE STATE, COUNTIES AND CITIES

From 2018 through the first quarter of 2022, the state has collected more than $3.7 billion in cannabis tax revenue, and that doesn’t include local taxes.

But Rex Richardson, Vice Mayor of the city of Long Beach, thinks state and local governments could be raking in more money.

“When other revenue sources went down, cannabis thrived,” Richardson said at that virtual news conference, discussing how his city lowered taxes from 6% to 1% for cannabis manufacturers, distributors and testing labs. That was just months before the pandemic began.

“Our revenue shot through the roof after that,” said Richardson.

After lowering taxes – and with increased demand as people stayed home during the pandemic – the city of Long Beach generated $5.6 million more from cannabis fees and taxes in fiscal year 2020 (Oct. 2019 – Sept. 2020) than they did in FY19. And in FY21, they brought in an additional $1.8 million, according to three city councilmembers in a March 15 letter to the Mayor and other councilmembers.

Valencia Maria Mota, Cannabis Program Specialist with Long Beach's Office of Cannabis Oversight, confirmed those numbers but later sent differing numbers - figures that showed even more significant jumps in cannabis revenues after taxes were lowered.

She said in FY19, the city of Long Beach got $4,042,267.60 million dollars in cannabis revenue. After lowering taxes, the city of Long Beach more than doubled their cannabis revenue, getting $10,289,430 million in FY20 (+$6.25M year-over-year) and an estimated $12,712,226.61 in FY21 (+$2.42M).

“I think the lesson here for local government is that if cannabis taxes are causing restrictions on supply, you can actually increase your tax revenue by lowering the rates and getting rid of red tape and making sure you don't have as much of a restrictive environment,” said Richardson.

Not everyone agrees with that theory. 

Robert Harris, a lobbyist for SEIU, told POLITICO last year, “the union disagrees with the industry argument that reducing tax rates will spur growth and eventually boost tax revenue… ‘I’ve never heard of an industry that didn’t say, “Reduce our taxes, we’ll sell more and you’ll make more,”’ he said.

Maisha Bahati of Crystal Nugs, however, is in favor of tax reform in her industry.

“We are advocating to the state that they have to look at that. If they want regulated businesses to thrive, then you have to make us competitive,” she said.

District Attorney Nancy O’Malley agreed.

“For the good of our state, regulating the process and the ultimate sale to consumers of cannabis is important,” she said. “However, let's not tax those legal operations right out of the market.”

CURRENT PROPOSED LEGISLATION RELATED TO CALIFORNIA’S CANNABIS MARKET

There are several bills state lawmakers are considering right now that aim to improve California’s cannabis industry.

Some say the problem is not so much the taxes as it is that California has a glut of cannabis and a limited market, so Senate Bill 1326 would allow California’s governor to enter into an agreement with the governor of another state to engage in interstate commerce in the cannabis industry.

RELATED: Tax cut for California pot industry: Too little, too late?

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