Is California’s cultivation tax cut too little, too late?

Businesses respond to California’s cannabis cultivation tax cut which took effect last week.

After four years of exhaustive efforts, California leaders eliminated the cultivation tax along with other changes, providing some bit of respite for cultivators. But does the plan just move money around, and is it even close to enough to save struggling farmers?

California Governor Gavin Newsom released his 2022-2023 revised budget on May 13—most notably containing the much-needed tax cuts. On June 29, Assembly Bill No. 195 passed in the Senate by 34-0, and the California Assembly voted 66-0 in favor of the bill. The bill took effect immediately following the signature of Newsom, providing the legal cannabis industry some much-needed temporary tax relief, which began July 1.

The state’s cultivation tax at over $161 per pound was scrapped and money was reallocated: Cannabis excise rate will remain at 15% for three fiscal years—but may be increased after July 1, 2025. Equity licensees will be able to retain 20% of the excise taxes they collect to reinvest into their businesses. They will also be eligible for a $10,000 tax credit. It also includes $40 million in tax credits, of which $20 million will go towards tax credits for storefront retail and microbusinesses, and $20 million for cannabis equity operators. The bill allows qualified businesses to claim tax credits of up to $250,000 for qualified expenditures beginning in the 2023 taxable year. It also adds additional enforcement tools against the illicit cannabis market.

Hardly a long-term solution

Doug Chloupek, CEO and founder of Juva Life, faced many of these tax woes as a manufacturing permit holder in California. When Newsom proposed his revised budget back in May, Chloupek said the cannabis cultivation tax cuts failed to fix several key problems. Keep an eye on those excise tax rates in the next three years, for instance.

“​​It’s slightly better than a three-card shuffle and a nice little pretty Band-Aid on its surface,” Chloupek tells High Times.

“Those who are entrenched in the industry would think, ‘Wow, this is an amazing thing.’ But at the end of the day, it’s more generally a bandaid to stop the inevitable bleeding that can only be fixed by the elimination of IRS Tax Code 280E—which is systemic to federal issues, and leaving it to a state like California, which has some of the highest taxation on a commodity that’s lost 80% of its value is just intrinsically the wrong move for our industry as a whole.”

In recent years, California’s price per pound of cannabis plummeted, and some growers faced what Johnny Casali from Huckleberry Farms described as “an extinction event.” A pound of cannabis—once worth up to $1,500 or more for some farmers—plummeted as low as $300 per pound. And when you shave off the $161+ per pound cultivation tax, that gobbles up half its value. Part of this price drop has been blamed on the advent of light deprivation weed.

“A good portion of the cultivation tax—which was being passed down by distributor to distributor to distributor and lost in the supply chain,” Chloupek says.

“So it was never being paid anyway. So in terms of a cultivator materializing, an extra $160 a pound in value to help bridge the gap of the intrinsically broken system that we fundamentally have. At its core, it’s going to do nothing to help us cultivators that are dropping like flies right now.”

Chloupek’s 12-year background in the legal market began when he says he became the first permit holder in the state of California for cannabis manufacturing. Juva Life received a license to operate a storefront in Redwood City, where during the application process Juva was the highest-scoring applicant. The retail store is already under construction, and planned to open in Q3. Juva Life is focusing on cannabis research to create longevity for their business, and recently closed $11.8 million in funding.

What businesses say

“It’s a fundamentally broken problem,” Chloupek adds.

“And they’re just looking at the industry as a cash cow, which is designed to fail, which is following the repetitive steps of every big transitional industry from big AG and Monsanto to a handful of them that have their monopoly to alcohol, tobacco, to form a they it’s a it’s a control consolidation is what you’re seeing right now. And by squeezing the industry at such a point by design or by unintentional or by thinking, all that’s doing is [hurting the people] who built it for the last 30 years, and who are being squeezed out of the industry. And unless you’re an MSO with a half a billion dollar market cap with, you know—$100 million in the bank to weather the next two years of storm, or you’re vertically integrated and you can barely squeak by your chances of surviving the next 2 to 3 years are next to nil.”

Members of the California Cannabis Industry Association seemed to agree that more steps are needed if the state is actually going to save the cannabis industry.

“The survival of the regulated industry is vital to providing ongoing tax revenues for the State and the advancement of public health and safety. Eliminating the cultivation tax is just one step towards stabilizing our industry but it’s an important one,” relays Lindsay Robinson, CCIA Executive Director.

Others say the legislation doesn’t go far enough regarding social equity measures.

“CCIA has worked for the past four years to eliminate the cultivation tax and we’re extremely proud of this important first step,” Robinson added.

“Stability of the cannabis supply chain brings jobs and much needed tax revenue to the state while also protecting public health and safety and keeping cannabis out of the hands of children.”

While dropping the cultivation tax was a step in the right direction, it’s hardly a fix for an industry that is still fundamentally flawed.