California Gov. Gavin Newsom Adds Tax Cuts in Revised Budget Proposal

Newsom announced the revision proposal on May 13, which aims to set aside $150 million in order to “temporarily reduce taxes” and simplify the tax structure, while $21 million will go toward local governments to help expand cannabis’s retail footprint.

Newsom said in response to a question from a Bloomberg reporter that he is “…addressing the persistent issue that is exactly what we anticipated would be a persistent issue—and that’s dealing with the black market, going after the illegal growers and the illegal operators,” Newsom explained. “Trying to level-set, trying to be flexible in terms of the cost pressures related to the current tax structure, and the lack thereof, in the black market.”

“This is [the] beginning of a process from my humble perspective, in terms of my thinking,” Newsom continued. “This will be a multi-year process to get that black market, get it on the retreat—not the ascendancy—and to get the retail and responsible adult-use market on steady ground.”

In conjunction with Newsom’s statement, the Department of Cannabis Control also released a statement from Director Nicole Elliot. “We have heard from many of you who have said that the current cannabis tax framework is overly complex,” Elliot wrote. “We know that current tax policies disproportionately burden cannabis farmers and small businesses and create instability throughout the supply chain, ultimately undermining the societal benefits of a taxed and regulated market.”

She summarized some of the changes in the proposal, which includes setting the cultivation tax to zero starting on July 1, strengthening tax enforcement policies, altering the deadline for collecting excise tax, and more. “I share this information because I wanted you all to know about the work the Governor’s Office is doing to support our collective efforts,” Elliot concluded. “Creating a sustainable, safe, equitable, and legal cannabis market in our state is no small feat—it is a labor of love, and it takes all of us working together to help make this a reality.”

The Reason Foundation, which promotes libertarian values, recently analyzed the possible results of altering the current cannabis tax. Ultimately, the organization recommended to repeal or suspend the current cultivation tax, reduce retail excise taxes, or pursue other methods to garner interest from local governments. “Tax costs are a significant component of retail prices and this analysis shows that a reduction in taxes can make legal products more price-competitive with illegal products and lure more consumers into the regulated market. This overall market growth will quickly displace the lost revenue resulting from a reduction in tax rates,” the Reason Foundation concluded.

Newsom initially unveiled his budget proposal for the 2022-2023 fiscal year in January, stating that he strives to make positive changes. “It is my goal to look at tax policy to stabilize markets; at the same time, it’s also my goal to get these municipalities to wake up to the opportunities to get rid of the illegal market and the illicit market and provide support and a regulatory framework for the legal market,” Newsom said. He shared that $595 million of cannabis tax revenue became available to fund substance abuse treatment efforts, environmental remediation illegal cultivation sites, and public safety activities.

In June 2021, Newsom proposed a $100 million package “to be provided as grants to cities and counties to help cannabis businesses transition from provisional to regular licenses.” Seventeen cities and counties were chosen to receive this grant.

Meanwhile, in late April, Assembly Bill 2691 was approved to allow small cannabis business owners to take their products directly to consumers at cannabis farmers markets and other special events. According to Assemblymember Jim Wood, who introduced the measure, this will help small cannabis businesses navigate through the various challenges of high taxes and competition with larger businesses, and will help increase visibility among local consumers.