San Francisco Assemblyman Proposes Tax Breaks for ‘Dying’ California Cannabis Industry

From the “You can’t make this @%&! up file,” Assemblyman Matt Haney (D-San Francisco) has authored a bill, AB 564, to “boost California’s legal cannabis economy,” which he says “is in sharp decline and losing ground to other states.”

Haney’s AB 564 would prevent a scheduled cannabis tax increase on July 1, 2025.  “that would devastate California’s legal cannabis industry, forcing small businesses to close and driving consumers toward the illicit market.”

Maybe the State of California has something to do with this, as the bill language clearly states:

“Existing law, the Cannabis Tax Law, imposes an excise tax upon purchasers of cannabis or cannabis products sold in this state at the rate of 15% of the gross receipts of any retail sale by a cannabis retailer, and, as enacted by the The Control, Regulate and Tax Adult Use (AUMA), imposed a cultivation tax on all harvested cannabis that entered the commercial market.”

(AB 195) amended AUMA to, among other things, discontinue the imposition of the cultivation tax on July 1, 2022. AB 195, beginning in the 2025–26 fiscal year and every 2 years thereafter, requires the California Department of Tax and Fee Administration to adjust the cannabis excise tax rate by a percentage that will generate an amount of revenue that would have been collected pursuant to the cultivation tax imposed prior to its discontinuation, as specified, not to exceed 19% of the gross receipts of retail sale.

This bill would repeal the requirement that the department adjust the cannabis excise tax rate, as described above, thereby retaining the existing cannabis excise tax rate of 15% of the gross receipts of any retail sale by a cannabis retailer, as provided.

Haney said his bill “will combat the threat of the growing illicit market by preventing an unprecedented 25% tax increase.”

Remember California’s “roll out” of the new law legalizing cannabis? There was none, while other states actually put a structure into place for the new “industry,” even offering tax breaks for cannabis entrepreneurs.

California waited until the last minute to begin regulations. Then politicians got greedy.

Perhaps the most interesting aspect was a report issued by the Governmental Accountability Institute in 2021, which the Globe highlighted. The report found California’s legal recreational and medicinal cannabis industry is not only “the biggest government-sanctioned market in the nation,” but also the “biggest legal marijuana market in the world:”

• Individual cannabis permits in the state have sold for as much as $17 million.
• There were more than 7,500 active cannabis licenses in California in 2020, including 910 retail dispensaries.

However, the reach of the unregulated market remains a major concern as estimates have revealed about $8.7 billion in black market sales, we reported in 2021. Thus, taking legal and illegal sales into account, the California market sold a whopping $12.0 billion in cannabis and related products in 2019.

This makes the legal cannabis market in California about $3.3 billion in sales, we reported.

The GAI said, “evidence suggests that the current California framework allows for increased corruption in a system where ‘money talks.’”

Where California’s pot industry gets dodgy is how many politicians and dozens of former government officials are involved. GAI found many left government to work for cannabis companies and the lobbying firms representing them. And the tangled web of state and local regulations only boosted corruption.

“Part of the problem is rooted in California’s dual regulatory structure, which forces cannabis businesses to comply with state and local government requirements,” GAI reports. “With the approval of state cannabis licenses in the hands of city councils, ‘a conflicting patchwork of local laws’ has emerged. Ultimately, with this type of decentralized permitting, ‘corruption can span from the highest to the lowest level of public officials.’ Since then, California has become a focus in the FBI’s investigation. At issue is whether local officials have abused the cannabis regulatory systems that they helped create.”

While the FBI has successfully taken down elected politicians in several California cities for “questionable business practices, which included paying as much as $250,000 cash in a brown paper bag to city officials,” the state’s capital, GAI found that Sacramento, is ground zero for dubious public-private interactions between local and state regulators and the industry. “Sacramento has even attracted national headlines because of its connection to a scheme that violated federal election laws.”

GAI explains:

“One of the key individuals linked to Sacramento’s cannabis licensing scandal is Joe Devlin, an experienced political consultant who helped shape the policies and standards of the local and state cannabis markets and eventually became Sacramento’s first ‘Cannabis Czar.’

Devlin had previously served as a legislative director in the California State Legislature and as a consultant to the Assembly’s Speaker. When candidate Jay Schenirer ran for Sacramento’s City Council in 2010, he hired Devlin’s private consulting firm, Santillan & Devlin LLC, to run point on the campaign. Schenirer won the election and hired Devlin to be his Chief of Staff, but Devlin kept his consulting practice on active status.

Notably, Santillan & Devlin provided consulting services for two important 2016 campaigns while Devlin served as Schenirer’s Chief of Staff. The first of these campaigns was when the former President of the California Senate, Darrell Steinberg, ran for Mayor of Sacramento. The second was to promote Schenirer’s ‘Measure Y’ ballot initiative, which sought a tax increase from 4 to 5 percent on marijuana cultivation and manufacturing businesses to fund city youth services.

As a result of these campaigns, Devlin’s firm was handsomely rewarded with nearly $50,000 in campaign expenditures from mayoral candidate Steinberg, and at least $24,000 from Schenirer’s Measure Y initiative.

These payments to Devlin’s firm (and to Devlin himself) were quite substantial for local elections. They were afforded by campaign budgets significantly enhanced by donations from companies in the local cannabis industry. From 2014 to 2019, these companies donated at least $225,000 for local elections, and about 90 percent of that amount went to campaigns for Steinberg (over $60,000), Schenirer (over $23,000), and Schenirer’s Measure Y cannabis tax (over $116,000).”

And:

“And while most cannabis-related regulatory and legislative action is happening at the state level, some national level political figures have leveraged their positions to make money from cannabis legalization. For example, in 2017, Paul Pelosi Jr., the son of House Speaker Nancy Pelosi, was named Chairman of the Board of Directors of Freedom Leaf, Inc., a consulting firm advising the budding marijuana industry. The following year, the company entered the CBD distribution business, while Pelosi purchased more
than $100,000 in company stock.

Former Republican Speaker of the House John Boehner, who staunchly opposed legalizing marijuana in Congress, is now bullish on the industry. “This is one of the most exciting opportunities you’ll ever be part of,” he says in a video announcing his new National Institute for Cannabis Investors. ‘Frankly, we can help you make a potential fortune.’ Boehner stands to earn an estimated $20 million if his group succeeds in persuading the federal government to legitimize marijuana.”

The GAI report does an extensive deep dive into California’s tangled web of corrupted cannabis businesses and bad state decisions.

In 2023, Gov. Newsom signed AB 195 into law, a broad cannabis tax relief bill, authored by the Committee on Budget. Under AB 195, California allowed two new tax credits for cannabis businesses for the tax years 2023 through 2027.

One of the credits is for “high-road” employers who meet certain employment requirements. According to the Franchise Tax Board, to qualify for the “high-road” cannabis tax credit, employers must provide full-time employees salaries, group health insurance and retirement benefits. Full-time employees must be paid no less than 150% but no more than 350% of the state minimum wage.

The other credit is for cannabis “equity” licensees. Business owners will be able to claim the credits against corporate franchise and income taxes or personal income taxes.

California politicians created this disaster and now are looking to offer “tax relief” to mitigate their implication in the “Dying’ California Cannabis Industry.”