Higher state cannabis taxes in 2020 raise concerns in South Bay

Cannabis consumers in the South Bay — who already pay between 30% and 40% in taxes when their budtender rings them up — are about to feel a fresh pinch to their wallets when a statewide tax on farmers and retailers takes effect in 2020.

Industry lobbyists, including Sean Kali-rai of the Silicon Valley Cannabis Alliance, say the new tax will push more consumers to the underground market, which could pose serious health risks. Federal officials linked more than 3,000 cases of a mysterious lung disease — including 47 deaths — to illicit cannabis concentrate cartridges.

“These are the same people who brought us the housing crisis and massive income inequality,” Kali-rai said. “Now they are going to do the same thing with the cannabis industry.”

The California Department of Tax and Fee Administration “stunned and outraged” the business side of California’s cannabis market when it announced in November that taxes would go up in January, the California Cannabis Industry Association said in a statement.

The association said California adding more taxes, as the state’s nascent recreational cannabis market “spirals towards collapse” would “drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk.”

California collects a 15% excise tax from cannabis consumers and San Jose collects an additional 10%. Every transaction also includes a sales tax that is at least the 9.25% charged by the state on all consumer transactions and maybe more when cities and counties have their own sales taxes. Those rates will remain the same in 2020, but retailers will face a 12.5% bump in taxes and farmers will see an increase of more than 4%.

But all of that eventually gets passed on to the consumer, the Silicon Valley cannabis lobbyist argued.

“Everything trickles down to the consumer level,” Kali-rai said. “Ultimately, you are taxing the consumer and that drives people into the black market.”

Before joining cannabis lifestyle brand Ikänik Farms earlier this year, Joseph Devlin was working for Sacramento as the city’s top cannabis regulator. Now he’s senior vice president of market development and external affairs for the California-based company.

Based on his experience, Devlin said the new taxes won’t result in massive market disruption, but the state is “going in the wrong direction” if it hopes to take existing cannabis consumers out of the black market and transition them into the legal, regulated, taxed market.

“The state needs to lower taxes on cannabis to move the consumer from the illicit market,” Devlin said.

Regulators have struggled in vain to eliminate the illegal marketplace for cannabis, he said. The state is squandering an opportunity — now that recreational cannabis is legal — to end the untaxed criminal enterprises that have been linked to violence associated with marijuana use and, more recently, public health threats linked to vaping-related diseases.

“We tried prohibition and we tried maximum enforcement and neither one of those things was successful at eliminating the illicit cannabis market,” Devlin said. “But we have a chance now to eliminate it by moving consumers over to the regulated market.”

Medical marijuana in schools and retail donations

But new legislation is not all bad news from an industry perspective, Kali-rai said. Senate Bill 1127, which also takes effect in January, will allow K-12 schools to decide whether students will be allowed to use medical marijuana on campus.

State law now bans cannabis at all schools, without exception for students who may use it as medicine to alleviate the symptoms of diseases like epilepsy and cancer.

The new law will allow a parent or guardian of such a student to come to campus and administer the medication — if school officials decide to allow it.

As a former industry regulator and public policy expert, Devlin said a conversation about marijuana as medicine is long overdue in the state, particularly as it applies to children.

“No one protests the idea of children taking their prescribed medication for ADHD at school,” Devlin said. “That’s part of a much broader conversation that is just beginning in our culture and we lack the science and data to support or reject what a segment of the population truly believes — which is that cannabis has medical value.”

Another new regulation set to take effect in 2020 is Senate Bill 34, which will allow retailers to donate medical marijuana to low-income consumers without any additional tax to the seller or the user.

Unlike increasing taxes, Devlin said this is a step in the right direction for the state to keep consumers out of the black market.

“A lot of these folks who are lower-income who were using cannabis medically have been priced out of the market,” Devlin said. “This bill is a way to keep them in the regulated market.”

Contact Adam F. Hutton at [email protected] or follow @adamfhutton on Twitter.