As Americans across the country begin gathering W-2s and various receipts to calculate personal income taxes, California’s legislature and governor are contemplating ways of making the state’s legalized marijuana industry more competitive by reducing taxes and streamlining the regulatory structure.

Upon legalization, California anticipated that a flourishing legal marijuana industry would lead to a diminishing illicit market and significant state tax revenue.  (Such is the hope of many states pursuing legalization.) Some proponents estimated that annual tax revenues from legal cannabis would reach $1 billion soon after legalization.  So far, however, tax revenue from cannabis has fallen short of expectations. The estimated amount for the current fiscal year is less than $500 million. For the next fiscal year, the state expects only a modest increase. Meanwhile, the state’s illicit market is estimated to be close to $10 billion.

High taxes may be one reason the legalized market has not met expectations.  The state applies a 15% excise tax on retail purchases of marijuana or marijuana products.  The excise tax is in addition to the state and local sales tax (which in some counties is over 10%).  In addition, cannabis growers are subject to a cultivation tax that is currently $9.65 per ounce of flowers and $2.87 per ounce of leaves.

AB 1948 Seeks To Make Legalized Market More Competitive

A recent bill proposed in the state assembly (AB 1948) by Rob Banta (D-Alameda) and Tom Lackey (R-Palmdale) would reduce the excise tax to 11% and suspend the cultivation tax, with both measures expiring on July 1, 2023.  Proponents of the new bill believe lowering taxes on marijuana will reduce the size of the state’s illicit market and stimulate sales in the legal market.  The bill includes a provision for measuring the success of the tax reductions, which will require comparing certain metrics before and after the tax reductions take effect, including: the number of licenses issued, the total annual and quarterly retail sales, and the total annual and quarterly cannabis-specific state tax receipts.

Governor Newsom Proposes Restructuring Of Cannabis Regulatory Agencies

In his current budget proposal, Governor Gavin Newsom proposed consolidating the licensing and regulation of the cannabis industry into one administrative agency, which will be known as the Department of Cannabis Control. Currently, three distinct licensing agencies are involved in the licensing and regulating legal cannabis.

Initial response from industry is generally favorable.  Undoubtedly, many other states will watch carefully to see whether these measures succeed.