California Governor Proposes a Cannabis Tax Reduction in an Effort to Shore Up the Legal Market

On Friday, May 13, California Gov. Gavin Newsom introduced proposed revisions to his 2022-2023 budget proposal, which would eliminate the cannabis cultivation tax rate beginning July 1, 2022.

The 15% excise tax on cannabis sales would remain, and the collection and remittance of that tax would be limited to retail sales beginning January 1, 2023. Currently, the cultivation tax rates are $10.08 per ounce of flower, $3.00 per ounce of trim, and $1.41 per ounce of fresh cannabis plant, and these taxes are paid on all recreational and medicinal cultivation of cannabis.

The Governor specifically stated that the goal of this proposed tax cut is to promote the state’s legal market, which has struggled to compete with the illicit market and is feeling the effects of inflation and reduced demand from pandemic peaks. Despite the tax cut, a recent analysis found that removing the cultivation tax would actually increase overall tax revenue from cannabis sales by 123 percent by 2024 due to an expected increase in sales.

Nicole Elliott, Director of the California Department of Cannabis Control, wrote in an email, “Governor Newsom delivered on his commitment to help simplify the tax structure by moving forward a proposal that, if approved by the Legislature, will remove unnecessary administrative burdens and costs, temporarily reduce the tax rate to support shifting consumers to the legal market, and stabilize the cannabis market.”

Newsom also proposed the creation of a one-time “cannabis local jurisdiction retail access grant program” to support the development and implementation of local retail licensing efforts; setting Allocation 3 funding for youth education, intervention and treatment, environmental restoration, and state and local law enforcement programs at a baseline of $670 million annually for three years; and strengthening tax enforcement policies to increase tax compliance and collection and reduce unfair competition.

Newsom announced in the May Revision that $670 million of the Cannabis Tax Fund will be available for youth education, prevention, early intervention, and treatment; environmental protection; and public safety-related activities, an increase of $74.7 million from the Governor’s Budget estimate.

To go into effect, the proposal must be approved by a two-thirds majority of the state legislature by June 15, 2022.


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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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