Will Cutting Taxes Help Cannabis Growers Survive Crashing Wholesale Prices?
Looking at California's big gamble.
Following four exhaustive years of extensive efforts, the leaders of California put an end to the tax on cultivation and other changes, giving a bit of reprieve to growers.
Cannabis businesses say the agenda is a far cry from what is needed to save struggling farmers. That being said, could it just be a means to shift funds around?
California's high taxes
In California, extensive legal sales started in 2018. Still, the sector has been hampered by high taxes that can be as high as 50% in some locations, expensive regulation, and competitive pressure from an active criminal market that, according to industry analysts, is at least twice as large as the legal one.
California governor Gavin Newsom sent out his 2022-23 adjusted budget, of which the so-craved tax cuts were the most noteworthy. On June 29, the Senate passed Assembly Bill No. 195 by a 34-0 vote, and the California Assembly also voted 66-0 for the bill to be passed. The bill came into effect right after the signature of Newsom, giving the legal marijuana industry some much-deserved tax relief, although temporary, which started on the 1st of July.
The cultivation tax in California, which was more than $161 per pound, was eliminated, and funds were redistributed: For three fiscal years, the cannabis excise rate will remain at 15%; but, after July 1, 2025, it may be raised. Equity licensees will be permitted to keep 20% of their excise taxes to put back into their companies.
Additionally, it contains $40 million in tax credits, of which $20 million will be allocated to tax breaks for small businesses and brick-and-mortar retailers, as well as another $20 million for cannabis equity operators.
With effect from the 2023 tax year, the measure enables qualified firms to claim tax credits of up to $250,000 for specified expenses. It also gives more devices for law enforcement to combat the black market for cannabis.
A long-term solution?
Founder and CEO of Juva Life, Doug Chloupek, encountered many of these tax afflictions as a manufacturing license holder in California. Chloupek stated that the marijuana production tax cuts did not fix various key issues. For instance, monitor those excise tax rates in the coming three years.
In a statement to High Times, Chloupek said it's a little better than a three-card shuffle and a lovely little Band-Aid on the surface (referring to the adjusted bill). He added that those well-versed in the field would be astounded and say this is a wonderful thing. The IRS Tax Code 280E is a systemic federal issue, and putting it in the hands of a state like California, which has some of the highest taxations on a product that has lost 80% of its value, is a fundamentally incorrect move for our industry as a whole.
However, it's more of a bandaid to stop the inevitable bleeding that can only be fixed by its elimination.
Wholesale weed prices have fallen
The price per pound of marijuana in California and other legal states fell precipitously in recent years, and few cultivators experienced what Johnny Casali of Huckleberry Farms called "an extinction catastrophe."
Cannabis used to be worth up to $1,500 or more per pound for certain farmers, but that price has since fallen to as little as $300. Additionally, half of its worth is lost when the cultivation tax of $161+ per pound is removed. A portion of the blame for the drop in the price of cannabis has been placed on the inception of light deprivation for cannabis.
According to Chloupek, "a significant amount of the cultivation tax" was lost in the supply chain as it was handed from wholesaler to wholesaler to wholesaler. "Therefore, it was never paid regardless. A grower would therefore be more valuable by $160 per pound, which would help close the gap in our inherently flawed system. Fundamentally, it won't benefit any of us farmers, who are currently disappearing like flies.
Chloupek claims he was the first person to obtain a marijuana manufacturing license in the state of California, marking the start of his 12-year career in the legal market. Juva Life, which obtained the highest rating during the process of application, was granted a license to run a storefront in Redwood City. The retail space is already being built, and it will debut in Q3. Juva Life recently closed $11.8 million in funding, focusing on marijuana research to build longevity for their company or organization.
What businesses are saying
Additionally, Chloupek stated that it is a deeply flawed problem.
"They're basically treating the sector as a cash cow, which is destined to fail, and are currently consolidating control in every major transitional business, from big AG and Monsanto to a select few of them that have monopolies to alcohol and cigarettes," he said. "And by compressing the industry at this juncture, whether on purpose or accidentally, it just hurts the people who developed it over the past 30 years and are being forced out of it. And not unless you are a vertically integrated MSO with a market cap of 500 million dollars and have, say, 100 million dollars in the bank to get through the next two years of the storm, your odds of surviving those two to three years are virtually nonexistent."
Some people claim the new bill does not seem extensive enough in regards to measures of social equity.
The proposal, according to Jerred Kiloh of the United Cannabis Business Association, a trade organization located in Los Angeles, would not allow businesses to lower the high consumer costs that have been pushing customers into the black market, where taxes are not levied, and prices are lower.
Kiloh cautioned that it's even possible that the strategy could raise prices for customers at the checkout counter. "All they are doing is moving some taxes around, which will never reach the customer," he added.
Although canceling the cultivation tax is seemingly a step in the right direction, it can hardly be said that it is a solution for an industry that is still primarily flawed.