WASHINGTON (CIRCA) — Wendy Kornberg's parents moved to Humboldt County, California, in the mid-1970s. While there, they started growing cannabis. Now, Kornberg owns her own cannabis farm. And in 2016, she entered into California's new legal cannabis market.
"I love that I don't have to be afraid of men falling out of helicopters and taking away my livelihood," Kornberg said, speaking about the previous fears of the illegal market.
But, she added, there's a caveat.
"The downside is absolutely that it is a very onerous process trying to get through to get your permits," she explained. "The taxation is really a weird system. ... In our county, you tax before you sell the product."
That taxation system is what California lawmakers are trying to provide some relief from with Assembly Bill 286 — also referred to as the Temporary Cannabis Tax Reduction Bill. The bill proposes to temporarily reduce state excise taxes from 15 percent to 11 percent, and suspend cultivation taxes — which currently are $9.25 per dry ounce of cannabis flower and $2.75 per ounce of dry cannabis leaf.
"We need to give the good guys a chance to succeed. Otherwise our one chance at creating a regulated industry will be compromised," said California Assembly member Tom Lackey (R-Palmdale).
One of those businesses trying to succeed within regulation is Mission Kosher Cannabis in central California, owned by Mitchell Davis. Mission grows, processes and sells kosher cannabis products like concentrates and prerolls (short for pre-rolled joint).
Davis says that he is paying taxes at every stage of his business process, from a cultivation tax after growing to an excise tax for distribution.
"When you factor in the state sales tax, the state's literally taking 40 percent of the retail dollars," he said. "They are literally my biggest partner."
Fitch credit rating, a global financial information services firm, said in 2017 that between state and municipal taxes, the tax rate on nonmedical cannabis would be as high as 45 percent. This tax rate is much higher than other legal states. Oregon's taxes, for example, are about 20 percent, and Alaska's range from 10 percent to 20 percent.
According to Davis, state and federal taxes can add up to 80 percent of his revenue. And that eventually transfers down to consumers — at times, in his opinion, leading them to take their business elsewhere.
"The black market's exploding because of the customer experience. They walk in and all of a sudden, cannabis is 30 percent or more expensive than they're used to."
When they see that price hike, says Davis, they may decide to return to the cheaper clandestine market, where they may already have experience getting their cannabis products in the past.
"For me, the whole idea of a cultivation tax is really ridiculous. We don't tax corn crops."
Between high regulations and taxes and competition from the still-thriving black market, California's legal cannabis industry is not experiencing the financial returns that were expected.
The initial estimate for cannabis tax revenue in the 2017-18 budget cycle was $185 million. Halfway through the cycle, that projection had to be updated to $84 million, $101 million less than previously expected.
And that is why, only one year into the market, California's lawmakers are offering a tax break.
"It is vital that licensed businesses are not undercut by the black market,” said Assembly member Ken Cooley (D-Rancho Cordova). “We need to be creative in helping to incentivize businesses to stay in the legal marketplace."
California is the latest state taking this step, but it's not the first. According to Fitch, other legal states like California, Washington and Oregon lowered their tax rate after legalization because of similar issues.
And while many farmers wish that the state assembly was doing more, they say these tax breaks can add up.
"The (cultivation) tax is $148 a pound. So if someone is producing 100 pounds a month, that's $15,000," Davis explained. Having that additional money would undeniably be very helpful, he said.
California's new tax law will suspend that cultivation tax completely, for a short time. And even though it will return eventually, Davis said that suspension will allow him to lay invaluable groundwork for his business to succeed in the long-term.
"Right now, it would allow me to do the brand building, invest the equipment that I want. Basically it's still a startup industry," he said.
Kornberg also agrees that the tax reduction is helpful. Every little bit helps, she says. But she has issues with the proposal.
"For me, the whole idea of a cultivation tax is really ridiculous," she said. "We don't tax corn crops."
She also dislikes the proposal that $100 million of tax revenue will be used to increase law enforcement of the black market. She feels like there is a better way to use that money that could improve the lives of struggling farmers immediately.
"I'd love to see something happen there where there is something that can support small farms and incentivize small farms, regenerative farms, organic farms; people who are doing it right, people who have been negatively impacted," she explained.
"It's very difficult as a small farmer," Kornberg said. "And I feel for everybody out there who is struggling, and I really hope that California makes some even bigger steps rather than just a reduction in tax."
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