A bipartisan bill aimed at reducing the price disparity between legal and “black market” cannabis by lowering taxes on recreational marijuana has been introduced in the California Assembly.

Assemblymembers Tom Lackey, R-Palmdale, and Rob Bonta, D-Oakland, announced a bill that will reduce the price disparity between legal cannabis business and black market sources. The bill will reduce existing state taxes on cannabis for three years as California implements Proposition 64 which legalized cannabis for adult-use.

“Voters have approved Proposition 64 and now it’s time for the state to carry out their will. As someone who spent 28 years in law enforcement, I know how sophisticated California’s black market for cannabis has become,” said Assemblyman Lackey. “Criminals do not pay business taxes, ensure consumers are 21 and over, obtain licenses or follow product safety regulations. We need to give legal businesses some temporary tax relief so they do not continue to be undercut by the black market.”

“California cannabis businesses are making significant investments as they embrace the regulated marketplace while, at the same time, being undercut by unregulated competitors,” said Assemblymember Rob Bonta. “AB 3157 reduces the tax burden on the licensed cannabis market during this transition period, keeping customers at licensed stores and helping ensure the regulated market survives and thrives.”

Currently legal cannabis sales include a state excise tax of 15 percent, a state cultivation tax of $9.25 per ounce of cannabis flower ($2.75 per ounce of cannabis leaf; $1.29 per ounce of fresh cannabis plant), traditional sales taxes (ranging from 7.25 percent to 9.25 percent), and local cannabis taxes which vary.

The Fitch credit rating agency estimates that the current cumulative tax rate in California is as high as 45 percent. Other states with legal adult-use like Washington and Oregon have successfully taken steps to reduce their tax rates and encourage the adoption of the legal market. Washington saw an exponential growth in cannabis tax revenue after it simplified its tax structure and reduced its rates—increasing from $13.4 million in June of 2015 (final month of initial tax rate) to $33.1 million in April of 2017.

“By lowering the excise tax and postponing the cultivation tax it will lower the overall price for consumers at the register, which will also reduce the differential between illicit and legal prices. Reducing this gap is critical to making the legal market more competitive against the illicit market and more attractive for consumers.” said Beau Whitney, Senior Economist at New Frontier Data.

Assembly Bill 3157 will suspend the state’s cultivation tax which currently charges a flat tax of $148 per pound. It will also reduce the state’s excise tax from 15 percent to 11 percent. Both tax reductions are temporary and would sunset in June 2021 after California’s regulated market has matured and has been fully implemented. The primary goal of the measure is to reduce the size of the state’s black market for cannabis and take money out of the pockets of criminals.

“One of the biggest threats to workers in the emerging legal cannabis industry is diversion of cannabis into the illegal market, which undermines our employers and our jobs. Lowering the tax rate on cannabis will encourage cannabis businesses to choose the legal market, which helps the entire industry and protects our members’ jobs,” said Jennifer Schwab, Representative of the International Brotherhood of Teamsters.

The transition of California’s legal market has been slow so far. The current tax structure places licensed businesses at a significant disadvantage to illegal retailers and black market sources.

Because California has had legalized medical marijuana since 1996 but lacked a statewide regulatory system, the state has a very sophisticated black market. According to the California Department of Food and Agriculture, California produced 13.5 million pounds of cannabis but only consumed 2.5 million in 2016.

AB 3157 is also joint authored by Assemblymembers Ken Cooley, D-Sacramento, Reggie Jones-Sawyer Sr., D-Los Angeles and Jim Wood, D-Healdsburg. The full text of the bill is available here.

Ed. Note: This above information was provided to KHTS by Assemblyman Tom Lackey’s Office.

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