SACRAMENTO, Calif. (April 6, 2022) – A bill introduced in the California Senate would provide tax relief for the state’s marijuana industry by discontinuing the cultivation tax and reducing an excise tax on cannabis.
Sen. Steven Bradford (D) introduced Senate Bill 1281 (SB1281) on Feb. 18. The state currently levies a flat-rate cultivation tax of $10.08 per dry-weight ounce of cannabis flower and $3 per dry-weight ounce for leaves. There is also a 15% excise tax levied at the retail level. SB1281 would eliminate the cultivation tax and would reduce the excise tax to 5%.
The existing tax scheme defines “average market price” in an arm’s length transaction to mean the average retail price determined by the wholesale cost of the cannabis or cannabis products sold or transferred to a cannabis retailer, plus a mark-up, as determined by the California Department of Tax and Fee Administration on a biannual basis in 6-month intervals. The proposed law would eliminate the markup in an “arms-length” transaction.
The cultivation tax is particularly onerous because it is added to the wholesale cost. The amount is taxed again by the excise tax. The tax is levied even if the marijuana never sells at the retail level.
As Ganjapreneuer reported, “The state and local taxes imposed on cannabis is one of the many factors that make legal cannabis more expensive than cannabis from the illicit market.” Cannabis Business Times called the cultivation tax “one more financial hurdle” for those growers interested in leaving the traditional market and finding a home in the newly regulated and licensed cannabis marketplace.
In effect, this tax reform would lower costs for growers, eliminate a barrier to entry into the market, and would help expand the cannabis industry in California.
EFFECT ON FEDERAL PROHIBITION
All of this is illegal according to the federal government.
Under the federal Controlled Substances Act (CSA) passed in 1970, the federal government maintains complete prohibition of marijuana. Of course, the federal government lacks any constitutional authority to ban or regulate cannabis within the borders of a state, despite the opinion of the politically connected lawyers on the Supreme Court. If you doubt this, ask yourself why it took a constitutional amendment to institute federal alcohol prohibition.
The legalization of marijuana in California removed a huge layer of laws prohibiting the possession and use of marijuana in the state even though federal prohibition remains in effect. This is significant because FBI statistics show that law enforcement makes approximately 99 of 100 marijuana arrests under state, not federal law. When states stop enforcing marijuana laws, they sweep away most of the basis for 99 percent of marijuana arrests.
Furthermore, figures indicate it would take 40 percent of the DEA’s yearly budget just to investigate and raid all of the dispensaries in Los Angeles – a single city in a single state. That doesn’t include the cost of prosecution. The lesson? The feds lack the resources to enforce marijuana prohibition without state assistance.
A GROWING MOVEMENT
Colorado, Washington state, Oregon and Alaska were the first states to legalize recreational cannabis, and California, Nevada, Maine and Massachusetts joined them after ballot initiatives in favor of legalization passed in November 2016. Michigan followed suit when voters legalized cannabis for general use in 2018. Vermont became the first state to legalize marijuana through a legislative act in 2018. Illinois followed suit in 2019. New Jersey, Montana and Arizona all legalized recreational marijuana through ballot measures in the 2020 election. Earlier this year, New York, New Mexico, Virginia and Connecticut legalized marijuana through legislative action.
With 37 states allowing cannabis for medical use, and 18 legalizing for adult recreational use, the feds find themselves in a position where they simply can’t enforce prohibition anymore.
The lesson here is pretty straightforward. As Tenth Amendment Center Executive Director Michael Boldin noted, “When enough people say, ‘No!’ to the federal government, and enough states pass laws backing those people up, there’s not much the feds can do to shove their so-called laws, regulations, or mandates down our throats.”
The move for tax relief highlights another important strategic reality. Once a state legalizes marijuana – even if only in a very limited way – the law tends to eventually expand. As the state tears down some barriers, markets develop and demand expands. That creates pressure to further relax state law. These new laws represent a further erosion of unconstitutional federal marijuana prohibition.
WHAT’S NEXT
SB1281 was referred to the Senate Committee on Government and Finance. It must receive a hearing and pass by a majority vote before moving forward in the legislative process.
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