JANUARY 2020 - Capitol Corner

Cannabis Highlights from Governor Newsom's State Budget Proposal

Governor Gavin Newsom unveiled a $222.2 billion budget proposal for 2020-21 on Friday – the second annual spending plan he has presented as governor and the largest in state history.

The 2020 budget proposal represents a 2.3% increase over last year and reflects $153 billion in general fund spending. The reserve account would hit $18 billion by 2021. The governor’s proposal also calls for some big changes in the cannabis space.

First, the governor wants to create a new Department of Cannabis Control. It would take the cannabis-related responsibilities of the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health and combine them under one agency.

Second, the governor wants to see changes to the tax system. These changes would “move the responsibility for the cultivation excise tax from the final distributor to the first, and for the retail excise tax from the distributor to the retailer.” The goal is simplification.

As Marijuana Moment notes, “doing so would allow businesses to avoid a requirement to ‘estimate product mark-up and set wholesale tax rates’ and therefore simplify both the industry’s tax burden as well as the collection process.” 

Newsom said the state is projecting $550 million in cannabis revenue. $332 million of that will go toward social programs and education.

Three Big Changes to Cannabis This Year

Three big changes were ushered into California’s cannabis market at the start of 2020. Two are the result of legislation passed last year. One is a tax increase previously announced by a state agency.

Higher Pot Taxes

In November, the California Department of Tax and Fee Administration announced an increase in the tax on wholesale cannabis from 60% to 80%, starting Jan. 1. This means higher prices for consumers. As wary industry officials and lawmakers note, it could bolster the state’s black market.

AB 34

Known as “The Dennis Peron and Brownie Mary Compassionate Care Act,” AB 34 will revive the compassionate care programs that were decimated after Prop. 64. It allows cannabis businesses to provide free medicinal cannabis products to patients who lack access or funds for medical marijuana, free of the current cultivation tax.

AB 37

Until now, cannabis businesses could not claim tax deductions the way other businesses do. As of Jan. 1, thanks to AB 37, that has changed.

“This bill, for each taxable year beginning on or after January 1, 2020, and before January 1, 2025, would specifically provide in the Personal Income Tax Law for nonconformity to that federal law disallowing a deduction or credit for business expenses of a trade or business whose activities consist of trafficking specified controlled substances only for commercial cannabis activity, as defined under MAUCRSA, by a licensee under MAUCRSA, thus allowing deduction of business expenses paid or incurred during the taxable year in carrying on that commercial cannabis activity under the Personal Income Tax Law.”

Voters May Have to Rescue California's Pot Industry

A state panel has warned the governor that California’s legal cannabis industry is in peril and it may take voter action to rescue the nascent market from further erosion. High taxation, over-regulation, local bans, and the robust black market they fuel has made it extremely difficult for the legal industry to compete, the Cannabis Advisory Committee warned in its recent draft report. The document was issued before an increase in cannabis taxes went into effect Jan. 1.

The report noted that “as much as 80% of the cannabis market in California remains illicit.” The legal cannabis market now generates around $3.1 billion in sales, compared to $8.7 billion in sales on the black market. The state was expected to take in $1 billion in revenue for the fiscal year that ended in June but collected $288 million instead.

The 22-member panel thinks it may be time for voters to step in. One possibility, touted by South Lake Tahoe City Council Member and National Cannabis Industry Assn. board member Cody Bass, is a statewide ballot measure that would require cities where a majority of voters supported Prop 64 to allow cannabis dispensaries. 

Gov. Newsom’s office continues to urge patience. His senior cannabis advisor Nicole Elliott said more work will be done to push cities and counties to allow commercial cannabis businesses. And the Bureau of Cannabis Control continues to step up enforcement operations in an effort to blunt competition from illegal sales.

Newsom waved off assertions that California’s cannabis industry is in dire trouble, despite a warning from an independent panel of experts. It takes time to perfect a relatively new legal industry he said, but the state is moving in the right direction.

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