Daily Tax Report: State

California Could Cut Pot Taxes to Help Legal Market ‘Thrive’

Jan. 28, 2019, 8:47 PM

California would lower its tax on recreational marijuana in the hopes of stimulating the industry and slowing the black market under newly introduced legislation.

The state would temporarily reduce its cannabis excise tax to 11 percent from 15 percent and suspend its cultivation tax through 2022 under a bill introduced Jan. 28 (A.B. 286). The measure was authored by Assemblymember Rob Bonta (D) and sponsored by state Treasurer Fiona Ma, the officials jointly announced.

“We are helping legal Cannabis businesses with their transition into the marketplace, just like we would for any startup industry,” Ma said in a statement.

The push for reduced cannabis taxes in California stems from fears that compliant cannabis businesses are being driven out by those in the “black” and “grey” markets, where taxes aren’t always paid. Cannabis shops opened their doors for recreational sales in January 2018, but the first six months of that year yielded $101 million below forecasts, according to the Treasurer’s office.

With A.B. 286, lawmakers hope to stimulate the legal cannabis industry by leveling out the playing field.

“The black market continues to undercut businesses that are complying with state regulations and doing things the right way,” Bonta said. “AB 286 will temporarily reduce the tax burden on these licensed operators to keep customers at licensed businesses and help ensure the regulated market survives and thrives. This very strategy has been shown to actually increase overall tax revenue in other states.”

Representatives for Ma said cannabis taxes can generate an estimated $8 billion to $20 billion in annual revenue for the state, but that businesses face significant barriers to legal entry. Among those barriers, according to the announcement, are “exorbitant” taxes and very limited access to banking.

To contact the reporter on this story: David McAfee in Los Angeles at dmcAfee@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Megan Pannone at mpannone@bloombergtax.com

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