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Is California’s Cultivation Tax Cut Too Little, Too Late?

California officials have eliminated the cultivation taxes after four years’ of tireless efforts. This provides some relief for growers. Is the plan just a way to move money, or is it enough to help struggling farmers?

California Governor Gavin Newsom released his 2022-2023 revised budget on May 13—most notably containing the much-needed tax cuts. Assembly Bill No. Assembly Bill No.195 was approved by the Senate with 34-0. California Assembly supported the bill 66-0. After Newsom signed the bill, it went into effect instantly. This provided temporary tax relief to the legal marijuana industry, which had been in place since July 1.

The state’s cultivation tax at over $161 per pound was scrapped and money was reallocated: Cannabis excise rate will remain at 15% for three fiscal years—but may be increased after July 1, 2025. The 20% excise tax that the state collects from equity licensees can be used to invest in their business. You will also qualify for a $10,000 tax credit. The bill also contains $40 million worth of tax credits. $20 million goes towards microbusinesses and storefront retail, while $20 million is for cannabis equity investors. Qualified businesses can claim tax credits up to $250,000 on qualified spending that begins in 2023. The bill also includes additional tools to enforce the illegal cannabis market.

A long-term solution is unlikely.

Doug Chloupek was the CEO of Juva Life and the founder. He had been a California manufacturer permit holder. Chloupek claimed that Newsom’s revised budget did not address many key issues when he presented it in May. You should be paying attention to the rates of excise tax in the coming three years.

“​​It’s slightly better than a three-card shuffle and a nice little pretty Band-Aid on its surface,” Chloupek tells Chronic News. “Those who are entrenched in the industry would think, ‘Wow, this is an amazing thing.’ But at the end of the day, it’s more generally a bandaid to stop the inevitable bleeding that can only be fixed by the elimination of IRS Tax Code 280E—which is systemic to federal issues, and leaving it to a state like California, which has some of the highest taxation on a commodity that’s lost 80% of its value is just intrinsically the wrong move for our industry as a whole.”

In recent years, California’s price per pound of cannabis plummeted, and some growers faced what Johnny Casali from Huckleberry Farms described as “an extinction event.” A pound of cannabis—once worth up to $1,500 or more for some farmers—plummeted as low as $300 per pound. The $161+ per-pound cultivation tax makes up the other half of its value. The advent of light-deprivation marijuana is partly responsible for the price decline.

“A good portion of the cultivation tax—which was being passed down by distributor to distributor to distributor and lost in the supply chain,” Chloupek says. “So it was never being paid anyway. If a cultivator is successful, an additional $160 per kilogram in value will be required to bridge the cost gap. Intrinsically brokenWe fundamentally already have the system. At its core, it’s going to do nothing to help us cultivators that are dropping like flies right now.”

Chloupek’s 12-year background in the legal market began when he says he became the first permit holder in the state of California for cannabis manufacturing. Juva Life obtained a license for Redwood City to run a retail storefront. Juva was, during the process of applying, the highest scoring applicant. Construction is underway on the retail store, which will open in Q3. Juva Life has recently raised $11.8 million to fund cannabis research and will be focusing their efforts on creating long-term sustainability for the business.

These are the words of businesses

“It’s a fundamentally broken problem,” Chloupek adds. “And they’re just looking at the industry as a cash cow, which is designed to fail, which is following the repetitive steps of every big transitional industry from big AG and Monsanto to a handful of them that have their monopoly to alcohol, tobacco, to form a they it’s a it’s a control consolidation is what you’re seeing right now. And by squeezing the industry at such a point by design or by unintentional or by thinking, all that’s doing is [hurting the people]It was built by people who have been in the business for 30 years and are now being pushed out. And unless you’re an MSO with a half a billion dollar market cap with, you know—$100 million in the bank to weather the next two years of storm, or you’re vertically integrated and you can barely squeak by your chances of surviving the next 2 to 3 years are next to nil.”

The members of California Cannabis Industry Association agreed that there are more measures needed to save cannabis.

“The survival of the regulated industry is vital to providing ongoing tax revenues for the State and the advancement of public health and safety. Eliminating the cultivation tax is just one step towards stabilizing our industry but it’s an important one,” relays Lindsay Robinson, CCIA Executive Director.

Others say the legislation doesn’t go far enough regarding social equity measures.

“CCIA has worked for the past four years to eliminate the cultivation tax and we’re extremely proud of this important first step,” Robinson added. “Stability of the cannabis supply chain brings jobs and much needed tax revenue to the state while also protecting public health and safety and keeping cannabis out of the hands of children.”

While dropping the cultivation tax was a step in the right direction, it’s hardly a fix for an industry that is still fundamentally flawed.