California has long been at the forefront of cannabis policy reform in the United States. From being the first state to legalize medical marijuana in 1996 to the eventual legalization of recreational cannabis in 2016, the Golden State has consistently pushed the boundaries of cannabis acceptance and regulation. One critical aspect of this regulatory framework is the taxation of commercial cannabis. Understanding the history of cannabis taxation in California can provide valuable insight into the industry’s growth and offer lessons for other states as they navigate their own regulatory landscapes.
Early Beginnings: Proposition 215 and the Medical Marijuana Industry
The commercial cannabis industry in California can trace its roots back to 1996, when voters approved Proposition 215, the Compassionate Use Act. This groundbreaking legislation allowed patients with certain medical conditions to access and use medical marijuana with a doctor’s recommendation. However, the law did not establish a formal taxation structure for the burgeoning medical marijuana industry.
In the years following Proposition 215, the state grappled with the question of how to regulate and tax the medical marijuana industry. The lack of a clear regulatory framework led to a patchwork of local ordinances and regulations, with some cities and counties imposing taxes on medical marijuana dispensaries and cultivation sites, while others did not.
Senate Bill 420: A Step Towards Regulation
The passage of Senate Bill 420 in 2003 marked a turning point for cannabis regulation in California. This legislation established the Medical Marijuana Program, creating a system of voluntary identification cards for medical marijuana patients and caregivers. While it did not create a statewide taxation structure, it provided a foundation for local governments to regulate and tax the industry more effectively.
Local Tax Measures and the Road to Legalization
Over the next decade, numerous local governments in California enacted tax measures aimed at medical marijuana businesses. These measures were primarily driven by the need to generate revenue for local jurisdictions, as well as to regulate and control the medical marijuana industry. Some of the most notable local tax measures included Oakland’s Measure F, which imposed a 5% gross receipts tax on medical marijuana businesses in 2009, and San Jose’s Measure U, which established a 10% gross receipts tax on medical marijuana dispensaries in 2010.
The Adult Use of Marijuana Act (AUMA) and Proposition 64
In November 2016, California voters approved Proposition 64, the Adult Use of Marijuana Act (AUMA), which legalized the recreational use of cannabis for adults aged 21 and over. This landmark legislation also established a comprehensive statewide taxation and regulatory structure for both the medical and recreational cannabis industries.
Under AUMA, the state imposes a 15% excise tax on the retail sale of cannabis products, as well as a cultivation tax on the cultivation of cannabis flowers ($9.65 per dry-weight ounce) and leaves ($2.87 per dry-weight ounce). These taxes are in addition to any local taxes and fees that may apply.
In addition to the statewide taxes, AUMA granted local governments the authority to impose additional taxes and fees on cannabis businesses within their jurisdictions. This has resulted in a complex patchwork of local tax rates and structures that can vary significantly between cities and counties.
The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA)
In June 2017, the California State Legislature passed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which merged the state’s medical and recreational cannabis regulatory systems. This legislation retained the tax rates established by AUMA, while also clarifying and streamlining the regulatory process for cannabis businesses.
Ongoing Taxation Challenges and Reforms
Since the passage of AUMA and MAUCRSA, California’s commercial cannabis industry has faced numerous taxation challenges and reforms. One of the most significant issues has been the high overall tax burden on cannabis businesses, which can reach up to 45% when combining state and local taxes. This high tax rate has made it difficult for licensed operators to compete with the still-thriving illicit market.
In response to these challenges, there have been several proposed tax reforms aimed at easing the financial burden on cannabis businesses and encouraging more consumers to purchase from licensed retailers. Some of these proposals include:
Assembly Bill 286 (2019): This bill, which ultimately did not pass, proposed to temporarily reduce the state’s cannabis excise tax from 15% to 11% and suspend the cultivation tax for a period of three years. The aim was to reduce the cost of legal cannabis products and make them more competitive with the black market.
Senate Bill 34 (2019): Signed into law by Governor Gavin Newsom, this legislation exempts qualified compassionate care programs from paying state cannabis taxes when providing free medical cannabis to financially disadvantaged patients. This bill aimed to ensure that low-income patients still had access to medical cannabis despite the high costs associated with the industry’s taxation.
Local Tax Reductions: Some local jurisdictions have taken it upon themselves to reduce their cannabis tax rates in an effort to support the growth of the legal industry. For example, in 2020, the city of Berkeley reduced its local cannabis tax rate from 10% to 5%.
Cannabis Tax Revenues and Social Equity: There has been increasing discussion around how cannabis tax revenues can be used to support social equity programs and reinvestment in communities disproportionately affected by the war on drugs. This has led to the establishment of initiatives such as the Cannabis Equity Grants Program, which aims to provide financial and technical assistance to social equity applicants and licensees.
The history of commercial cannabis taxation in California has been marked by significant changes and ongoing challenges. As the industry continues to evolve and mature, it is likely that further tax reforms and adjustments will be necessary to strike the right balance between generating revenue for the state, supporting the growth of the legal cannabis market, and addressing the social and economic disparities that have arisen from decades of cannabis prohibition.
By understanding the history of cannabis taxation in California, policymakers, industry stakeholders, and consumers can better appreciate the complexities of this rapidly evolving market and work together to create a more equitable and sustainable future for the cannabis industry.