SACRAMENTO, Calif. (July 8, 2022) – California Gov. Gavin Newsome has signed a bill into law that will provide some tax relief for the state’s marijuana growers.
The House Budget Committee introduced Assembly Bill 195 (AB195) earlier this year. The new law makes several changes to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) including the repeal of the cultivation tax.
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 percent excise tax levied at the retail level. The new law eliminates the cultivation tax.
Another proposal passed in the California Senate would have cut the excise tax to 5 percent. The new law retains the excise tax but changes the way it is calculated, and it will be collected directly from the consumer. The new law will also empower the California Department of Tax and Fee Administration (CDTFA) to adjust the cannabis excise tax rate by a percentage that will generate an amount of revenue that would have been collected pursuant to the cultivation tax imposed prior to its discontinuation under this bill with a 19 percent cap.
The Assembly passed AB195 by a 56-18 vote. The Senate approved the measure by a 34-0 vote. With Newsome’s signature, the new taxing scheme will go into effect on Jan. 1, 2023.
Reason called the passage of AB195 “modest” tax relief. A study from the Reason Foundation calculated that the tax burden on legal cannabis companies in California could reach as high as $1,441 a pound under the old scheme, compared to averages of $340 per pound in Oregon and $526 a pound in Colorado. As a result, two-thirds of marijuana purchases in California take place through unlicensed vendors.
The hope is that lowering the tax burden on cultivators will push more growers into the legal market.
“The illicit market has been propped up by a tax-induced price disparity between legal and illegal cannabis products and by a dearth of legal cannabis retailers across large geographic regions of the state,” Reason Foundation Director of Drug Policy Geoffery Lawrence said in a written statement. “Assembly Bill 195 addresses both of these issues by eliminating the wholesale cultivation tax and providing additional incentives for local governments to license legal retailers.”
AB195 also includes additional enforcement mechanisms and penalties for unlicensed marijuana growers, and the law will give labor unions more power of the marijuana business licensing process.
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 a 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.
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