Close to Home: Cannabis is an essential, but unsupported, business

If California's licensed cannabis businesses are taxed in a manner that allows them to compete with the illicit market, the industry will be poised to play a vital role in the state's recovery.|

Let's remember why California legalized cannabis in the first place.

Proposition 64 established 27 voter-mandated goals. No less than five were aimed at eradicating the illicit market. The voter-approved initiative begins with this statement: “It is the intent of the People in enacting this Act … to take non-medical marijuana production and sales out of the hands of the illegal market.” The proposition goes on to underscore that the specific intent is “to tax the growth and sale of marijuana in a way that drives out the illicit market … (and) prevents illegal production and distribution.

The voters couldn‘t have been more clear about what they wanted. Unfortunately, that's not how it has played out. In 2017, tens of thousands of California businesses were operating in compliance with Proposition 215, the loosely regulated medical marijuana framework. In 2018, about 80% of those businesses failed to meet the new requirements for state licensing. Most closed their doors and discharged employees or retreated to the illicit market. And the customers went with them.

Facing prices as much as 300% higher in the regulated market, cannabis consumers said “no” to high prices with their wallets. To this day, an estimated 4 out of every 5 cannabis consumers in California purchases products from the illegal market. In fact, those of us in the industry now refer to legalization as an “extinction event.”

Sadly, it was the first of several.

The second extinction event happened this past fall. The “vaping crisis,” as it's commonly referred to, wasn't actually a “vaping” crisis at all. It was mass poisoning perpetrated by illegal manufacturers - the very organizations that Proposition 64 was meant to shut down. Many licensed businesses didn't survive the downturn in sales. Without access to traditional banking services, more companies were forced to close. There were massive layoffs across the industry. Minority-owned businesses were hit the hardest.

That brings us to today. While institutional challenges pre-date COVID-19, this pandemic has transformed them into existential obstacles. As consumers' desire for both recreational and therapeutic cannabis is increasing, massive unemployment and a recession mean most people simply can't afford to pay an effective tax rate of 40% to 50%. Compounding the problem is cannabis's exclusion from federal relief packages. Many of the smaller businesses in particular are unlikely to survive.

Over the past two years, the industry has worked collaboratively with the state Legislature to promulgate cannabis tax reform that would enable licensed businesses to compete. This work culminated in Assembly Bill 1948, legislation introduced by Assemblyman Rob Bonta, D-Alameda, and others. AB 1948 would temporarily address the unsustainable price disparity between legal and illegal cannabis sources by suspending the cultivation tax and reducing the excise tax from 15% to 11%.

Unfortunately, that bill is now at risk. It's scheduled to be voted on by the Assembly Revenue and Taxation Committee on May 18, but policymakers have indicated they will hold it because it doesn't relate to COVID-19.

But it does relate to COVID-19.

Suppose everyone who bought cannabis in California purchased it in the legal market. The tax base would increase, and the industry would quadruple in size. With that growth would come tens of thousands of new jobs - many of them well-paid union jobs - at a time when the state sorely needs them. Public safety would also improve: Regulated cannabis is tested, licensed businesses don't sell to minors, and they don't accidentally level buildings like an illegal hash lab did in Alameda recently.

If California's licensed cannabis businesses are taxed in a manner that allows them to effectively compete with the illicit market, the industry will be poised to play a vital role in the state's post-pandemic economic recovery. Absent such changes, cannabis will be contributing to more job loss, and the promises made to California voters will be broken.

Tiffany Devitt is a president of Care By Design. She's also on the board of directors of CannaCraft, Inc., the California Cannabis Industry Association and the National Cannabis Roundtable.

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