For years, the California commercial cannabis community has argued that the taxes are too high. With dropping pot prices, slowing consumer sales at the retail level, impending tax hikes, and illicit production in the ever-expanding market, things have come to a head recently. Industry insiders are pushing Governor Newsom for tax reform, and he’s listening. Newsom has publicly stated that he supports the reform, and his spokesperson, Erin Mellon, recently said that “the current tax construction has unintended but serious consequences” in reference to the continued strength of the underground market.
With higher regulatory costs and a heavy tax burden, legal firms find it difficult to compete with illicit market operators who do not have the same cost structure. Although more cannabis tax dollars are spent on law enforcement, the underground or unregulated market continues to thrive. As mentioned last week, the Sheriff’s Office estimates around 4,000 illegal farms in Humboldt alone. Statewide, the reports are the same. For example, Southern California has seen a massive influx of illegal operators setting up huge scenes in the California desert around areas like Palmdale and others.
With millions of pounds produced, in many cases with cheap or forced migrant labor, illicit operators are flooding the market and putting downward pressure on prices. Unfortunately, when given the opportunity to buy more expensive products through legal channels or much cheaper on the street, many consumers opt for the latter.
Retailers and growers are feeling the pain. A recent report from the California Office of Legislative Analysts notes that, on average, pottery stores pay a tax rate of 27% based on state excise tax and tax on mark-ups alone. of price. Add to that the costs of running businesses, payroll taxes, worker compensation, and local taxes, and it is clear that the legal market faces an uphill battle to compete with the black market, where no taxes are paid. paid. In fact, regulated storefront price tags are estimated to be 50% higher than street prices.
Growers face an even more difficult scenario. Here at Humboldt, growers pay $ 1 to $ 3 per square foot of growing area depending on whether they’re growing outdoors, in mixed light, or indoors. In addition, the state charges growers about $ 154 per pound and about $ 46 per pound for pruning. These rates are expected to increase by nearly 5% the first of the year, as the law ties tax rates on crops to the rate of inflation. Given the wholesale or bulk prices of flowers currently around $ 400, taxes for growers of sun-grown or outdoor cannabis are extremely high and make competition with illegal operators almost impossible.
Many conscientious consumers prefer to purchase laboratory-tested, pesticide and pathogen-free products from an authorized distribution center and are willing to pay more for them. Others, however, shop at price and buy from the underground market, even though the illicit products are often loaded with harmful pesticides and fungicides. In organic cultivation, keeping plants free from pests and pathogens like late blight can take a lot of effort. Many growers, especially those who grow in areas with high nighttime humidity, often spray the plants once a week with approved pesticides such as oils, insecticidal soaps, or citric acid products. Not only is it expensive, but it takes time. Those who use hazardous chemicals can spray once or twice per complete cycle and be done. Some of these poisons stay in the plant for months and are incredibly unhealthy when burned.
It’s getting worse. The Connecticut Forensic Science Laboratory reports that in the past four months, some 39 people who claim to have used cannabis have overdosed at varying levels. The culprit: a fentanyl flower. Fentanyl is an incredibly potent and highly addictive narcotic that is estimated to be around 50 times more potent than heroin. So not only are products grown and sold illicitly often tainted with harmful toxins, but cannabis is now filled with deadly and addicting compoundsâ¦ frightening things indeed. While not everyone who sells cannabis in the unregulated market poisons their products, in general, products sold on the streets are much more likely to be toxic. Additionally, unregulated crops tend to have much more egregious environmental violations, and many resort to forced labor, subjecting employees to terrible living conditions and inhumane treatment.
By reducing tax rates, growers and retailers can become more price competitive and can begin to compete more effectively with unlicensed operators. Prices for consumers can be reduced and, in all likelihood, more operators would enter the regulated space. With greater participation in legal channels, the state would have a larger and more sustainable tax base, and revenues would meet or likely exceed those currently received. Interestingly, the aforementioned Office of Legislative Analysts makes the same argument – that lowering tax rates for legal operators will help curb illicit activity and contribute to a more functional industry.
As a person who grows commercially, I obviously have a grinding ax in this business and would like to see lower taxes and more participation in the legal market. Having said that, I am also sensitive to the arguments that we cannabis growers are a bunch of tax evaders. I remind my colleagues that when we initially lobbied the County and State of California to allow cash cultivation several years ago, many of us expressed a desire to support our communities by paying taxes. In fact, tax revenues for localities and the state have been one of the main selling points in legitimizing the industry. When Humboldt County finally proposed growing tax rates twice as high as the $ 1 to $ 3 range, a slew of growers came to the watchdog, arguing the rates were too high. I think the growing community and the California cannabis industry in general have suffered a reputation blow as a result. Some county officials agreed. County Treasurer Mr. Bartholomew called the cultivation community during this meeting and noted that many had avoided taxes for 20 years. It was filmed and it really gave me the feeling that our industry had a lot of bridges to build and a long way to go in terms of professionalization and legitimation.
Fast forward a few years to the present time and there are now calls from across the industry for a complete repeal of state cultivation taxes and a break of the 15 year excise tax. percent on products. To be clear, I fully support my colleagues in the area of ââtax reform and reduction, but I understand how some in the community will roll their eyes upon hearing this.
I would remind people of three simple truths. First, cannabis is here to stay and will soon be legally produced and distributed around the world. Despite your personal opinions, acceptance of cannabis as a medicine and as an honorable profession is growing around the world, and the train has already left the station. Second, without cannabis, Humboldt’s economic outlook looks bleak, at least in the short to medium term. Finally, if legal operators cannot become more competitive, the illicit market will continue to dominate the industry and continue to harm the environment, workers and consumers.
Jesse Duncan is a longtime Humboldt County resident, father of six, retired financial advisor and full-time commercial cannabis producer. He is also the creator of NorCal Financial and Cannabis Consulting, a free platform that helps smallholder farmers improve their culture, business and financial skills. Please check out his blog on, his Instagram at jesse_duncann, and connect with him on Linkedin.