California governor won’t stop July increase in marijuana excise tax

(This story was updated at 5:38 p.m. ET with industry comment.)

There’s some good news for California’s $4.6 billion marijuana industry in Gov. Gavin Newsom’s updated budget proposal released Wednesday.

However, while some might applaud the proposals for tougher action against illicit operators and no increase in licensing fees, it’s not the tax relief demanded by the beleaguered sector.

That leaves precious little time for industry lobbyists to convince money-conscious lawmakers – and a governor with presidential aspirations – to gift legal marijuana a bailout.

Industry operators across California are dreading July 1, when the state excise tax is scheduled to increase from 15% to 19% under a recent tweak in state law.

While the extra levy – imposed after the state cut the cultivation tax – will be felt most keenly at retailers’ cash registers, observers say the pile-on will be felt across the marijuana supply chain as more consumers seek cheaper products from the illicit market.

“California’s legal cannabis industry continues to operate on razor-thin margins, and the scheduled increase to a 19% excise tax will push more consumers toward the illicit market – the very outcome state policymakers are working to avoid,” said Angelica Sanchez, the senior government affairs director at MWG Holdings, which owns and operates California cannabis company Perfect Union.

“We are actively working to oppose this increase and engaging on pending legislation, with the goal of keeping legal cannabis affordable and accessible.”

Legislative options include a bill introduced by state Assembly Member Matt Haney, a San Francisco Democrat, but extraordinary effort will be needed to tuck a cannabis tax cut into budget-trailer legislation before the rate increase goes into effect.

Many industry observers hoped Newsom would propose delaying the tax increase – or even cut it entirely.

The revision released Wednesday does neither, however; it merely passes to state lawmakers the difficult task of cutting the excise tax in a budget-deficit year.

The tax crunch is not the only problem confronting the California marijuana industry and the state’s Department of Cannabis Control (DCC), however.

Like many other government entities, the DCC is staring down a budget deficit.

Newsom’s May budget revision includes shifting marijuana tax money from the Cannabis Control Fund to the Cannabis Tax Fund.

That’s a seemingly wonky maneuver with serious real-world consequences, as it avoids any increase in existing marijuana business fees.

Moving around the money the DCC uses to crack down on the state’s enormous illicit market means enforcement can continue “without imposing significant fee increases on existing licensees,” according to the budget document released Wednesday.

The budget proposal also includes some new enforcement powers.

Similar to the Operation Padlock to Protect program credited with boosting the legal industry in New York state, the DCC would be granted the power “to seal an unlicensed premises when it is involved in illicit commercial cannabis activities,” according to Newsom’s budget document.

The budget proposal also seeks to encourage more cities and counties to allow cannabis retail.

Newsom’s plan would allow “local governments that prohibit cannabis cultivation” to remain eligible for state grants funded by marijuana tax revenue “if they authorize retail cannabis sales.”

For an industry that’s experienced sales declines year-over-year since the COVID-19 pandemic, that’s too little, too late.

“California’s legal cannabis industry cannot withstand a more than 25% tax increase when sales have already declined by 19% and thousands of businesses have closed their doors,” said Amy O’Gorman Jenkins, executive director of the California Cannabis Operators Association.

“Raising taxes on a struggling industry – especially one already undercut by untaxed, unregulated operators – defies economic sense and contradicts Proposition 64’s core intent.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.

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