With Governor Gavin Newsom’s 2020-21 budget, big changes are coming for the state’s nascent, legal cannabis market — also the nation’s largest.
California’s adult use market has been struggling for a number of reasons, including local bans on cannabis businesses, which the industry says exacerbates its most significant concern: the persistent, sprawling illicit market, which, as it is untaxed and unregulated, has been threatening the bottom line of legal cannabis businesses.
It was with this backdrop that Newsom gave a nearly three-hour, detailed briefing and question and answer with reporters about his budget, which, in short, would streamline how taxes are collected and will merge regulation into a single body in an effort to bolster the legal industry.
Nicole Elliott, Newsom’s senior advisor on cannabis, tweeted after the briefing, “At the top of @CAgovernor @GavinNewsom’s cannabis #CAbudget agenda: REGULATORY & TAX SIMPLIFICATION. 2020 is going to be a big year for CA ?”
California Bureau of Cannabis Control Chief Lori Ajax’ spokesperson Alex Traverso told Cannabis Wire, on the consolidation of cannabis regulation, and the potential impact it could have on taxes and on the sprawling illicit market in California, “Without getting too much into specifics since everything is fairly new and obviously there is still work to do, I think today’s announcement shows that the administration is listening to feedback from industry stakeholders and is willing to make changes where necessary to help the supply chain run smoothly.”
Here are the major highlights from the budget:
1) A new regulatory body: One major headache when it comes to regulation and enforcement has been the number of entities in the state that play some role in the industry. In addition to the three entities in charge of licensing different parts of the supply chain, there are a number of entities like the State Water Resources Control Board that have a narrower but significant regulatory purview.
“In an effort to improve access to licensing and simplify regulatory oversight” of the industry, and to “centralize and align critical regulatory functions,” Newsom’s budget proposes putting all cannabis business licensing under one entity, a newly formed Department of Cannabis Control, by next July. Currently, three entities are in charge of licensing: Bureau of Cannabis Control, California Department of Public Health, California Department of Food and Agriculture.
2) Simplified tax process: The budget contained proposals to “simplify” the tax collection process, which is long overdue (a December 2019 report from the state Legislative Analyst’s Office detailed, over dozens of pages, potential improvements). And, significantly, Newsom indicated a willingness to make further changes to support the legal market, which has been pushing for a lower tax to allow them to compete with the illicit and untaxed market. The budget reads, “The Administration, in consultation with the industry and stakeholders, will consider other changes to the existing cannabis tax structure, including the number of taxes and tax rates to simplify the system and to support a stronger, safer legal cannabis market.”
3) New excise tax revenue and allocation estimates: On the tax revenue front, excise tax revenue is estimated to hit $479 in 2019-20 and $550 million in 2020-21. Of the expected tax revenue in 2020-21, $332.8 million will go toward: education, prevention and treatment (60%, or $199.7 million); environmental clean up from illegal grows (20% or $66.6 million); and public safety (20% or $66.6 million).
(A separate section of the budget devoted to child care devotes $50 million from the Cannabis Fund “to support over 3,000 General Child Care slots previously funded with the General Fund” and another $10.3 from the Cannabis Fund “for an increase of 621 General Child Care slots.”)
The excise tax revenue estimates included the expected caveats: the first is that this estimate “assumed continued growth of more than 15 percent annually as new businesses continue to enter the marketplace and local jurisdictions adjust to the state’s legal framework.” The majority of jurisdictions in the state still ban cannabis businesses. The second caveat is that, “in the near term, revenue estimates will be subject to significant uncertainty because the market has only recently been established.” This is why Newsom’s revised 2019-2020 budget proposal included a significant reduction in expected excise tax revenue from cannabis. That revised budget read, “The cannabis excise tax is forecast to generate $288 million in 2018-19 and $359 million in 2019-20, a reduction of $67 million and $156 million, respectively, from the Governor’s Budget forecast.”
Following Newsom’s press conference, there was early celebration from California’s cannabis industry. The Southern California Coalition, a large trade group comprised of cannabis businesses in the region, sent its members a congratulatory email saying the Coalition “campaigned hard from the very beginning against the excise tax formula” — a reference to one of the proposed changes in the budget — “as did many others, creating a strong, unified voice against the practice. Many voices singing the same song make a mighty noise, one impossible to ignore.”