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California Cannabis Operators Warn of Possible Industry Collapse

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California Cannabis Operators Warn of Possible Industry Collapse

California’s licensed cannabis businesses are warning state leaders that high taxes and competition from the unregulated market has the industry on the verge of collapse.

Leaders of California cannabis companies warned Gov. Gavin Newson and lawmakers last week that the state’s regulated marijuana industry is in danger of collapse, calling for tax relief and an improved retail market to support ailing businesses.

In a letter sent to Newsom, Senate President Pro Tempore Toni Atkins, and Speaker of the Assembly Anthony Rendon, more than two dozen cannabis advocates and industry executives noted that the goals of cannabis legalization in California included ending the illicit marijuana market and protecting public safety while creating an accountable regulated industry. But four years after the start of legal sales, the “industry is collapsing.”

“We need you to understand that we have been pushed to a breaking point,” the cannabis industry leaders wrote in the letter to Newsom and legislative leaders.

The Shortcomings of California Cannabis Legalization

The letter cites several shortcomings of cannabis legalization in California, including high taxation for legal operators that results in dispensary prices that are 50% more than the illicit market. Industry leaders also faulted the ability of local governments to ban cannabis businesses from locating in their jurisdictions, a situation that leaves only one-third of municipalities with local access to regulated cannabis products. The result is a market ripe for unregulated operators, with 75% of the cannabis in California coming from the illicit market, all of it untested and potentially unsafe.

Industry executives also noted the failure to adequately address the harms caused to communities of color by the failed War on Drugs. Taken together, cannabis legalization has led to a regulatory environment that threatens the viability of cannabis businesses, particularly legacy operators making the transition from California’s traditional unregulated market.

“It is critical to recognize that an unwillingness to effectively legislate, implement, and oversee a functional regulated cannabis industry has brought us to our knees,” they wrote. “The California cannabis system is a nation-wide mockery; a public policy lesson in what not to do.”

“Despite decades of persecution by the government, we have been willing and adaptable partners in the struggle to regulate cannabis,” the letter continues. “We have asked tirelessly for change, with countless appeals to lawmakers that have gone unheard. We have collectively reached a point of intolerable tension, and we will no longer support a system that perpetuates a failed and regressive War on Drugs.”

Businesses and groups signing the letter to Newsom include California Cannabis Industry Association, the California chapter of the National Organization for the Reform of Marijuana Laws, the Los Angeles-based United Cannabis Business Association, Papa & Barkley, Flow Kana Inc., Harborside Inc., and CannaCraft.

Cannabis Industry Pleads for Tax Relief

Those signing the letter asked for the elimination of California’s cultivation tax, which they say makes cannabis the only agricultural product that is taxed at the farm. Noting the state’s $31 billion budget surplus, they also requested a three-holiday from collecting the cannabis excise tax, followed by a graduated return of the tax over subsequent years.

“We are looking for an immediate suspension of the cultivation tax, which is an incredibly burdensome tax that compounds throughout the legal supply chain,” Lindsay Robinson, executive director of the California Cannabis Industry Association, told reporters at a virtual press conference on Friday. “So that’s one avenue that we are pursuing. We’d also like the lawmakers through the legislative process or the budget process. Consider suspending the excise tax or reducing the excise tax for the foreseeable future until the legal market can really start to grow and thrive.”

The industry executives also called for an expansion of retail access to support floundering operators, noting that 68% of local governments have failed to allow for regulated cannabis in their jurisdictions. They propose legislation that would force every city and county where a majority of voters approved Proposition 64, the landmark cannabis legalization initiative passed by voters in 2016, to adopt measures to regulate cannabis by July 1, 2022. Jurisdictions that failed to act would default to the state’s rules for regulated cannabis.

CannaCraft chief of government and consumer affairs Tiffany Devitt says that California has not lived up to the goals of cannabis legalization and is putting the health of the industry in jeopardy.

“The Newsom administration is failing the majority of California voters who support legal recreational marijuana by perpetuating wrong-headed tax, licensing and enforcement policies that are decimating a once vibrant industry,” Devitt wrote in an email to Cannabis Now. “Inaction is costing our state jobs, strengthening the already dominant illicit market, and ensuring that one of California’s great heritage industries will be non-competitive when federal legalization occurs.”

Erin Mellon, a spokeswoman for the governor, said in a statement that Newsom supports cannabis tax reform and recognizes the system needs reform, including increased efforts to stem the unregulated market.

“It’s clear that the current tax construct is presenting unintended but serious challenges,” Mellon said. “Any tax-reform effort in this space will require action from two-thirds of the Legislature and the Governor is open to working with them on a solution.”

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