Is California’s Crop Tax Cut Too Little, Too Late?

After four years of exhaustive efforts, Californian leaders abolished the cultivation tax along with other changes, giving cultivators a little breather. But is the plan just shifting money, and is it even close to enough to save struggling farmers?

California Gov. Gavin Newsom released his revised 2022-2023 budget on May 13, which includes much-needed tax cuts. On June 29, the Senate passed Assembly Law No. 195 by a vote of 34 to 0, and the California Assembly passed the law by a vote of 66 to 0. The law went into effect immediately after Newsom signed it, providing the legal cannabis industry with some much-needed temporary tax breaks, beginning July 1.

The state cultivation tax of over $161 per pound has been eliminated and the money reallocated: The cannabis excise tax rate will remain at 15% for three tax years — but may increase after July 1, 2025. Equity license holders can keep 20% of any excise taxes they collect to reinvest in their businesses. You are also eligible for a $10,000 tax credit. It also includes $40 million in tax credits, of which $20 million will be used for retail and micro-business tax credits and $20 million for cannabis equity operators. The bill allows qualifying businesses to claim tax credits of up to $250,000 for qualifying expenses beginning in the 2023 tax 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 issues as a manufacturing licensee in California. When Newsom proposed its revised budget in May, Chloupek said the cannabis cultivation tax cuts failed to solve several key problems. For example, keep an eye on these excise rates over the next three years.

“It’s a little better than a three-card shuffle and a nice little nice patch on its face,” Chloupek tells the High Times. “Those rooted in the industry would think, ‘Wow, that’s an amazing thing.’ But at the end of the day, it’s more of a band-aid to stop the inevitable bleeding that can only be fixed by eliminating IRS Tax Code 280E — which is systemic to federal affairs — and leaving it to a state like California, which has some of the highest taxes on a commodity that has lost 80% of its value is in and of itself the wrong move for our industry as a whole.”

In recent years, the price per pound of cannabis has plummeted in California, and some growers have faced what Johnny Casali of Huckleberry Farms called “extinction.” A pound of cannabis – once worth as much as $1,500 or more to some farmers – has fallen to as low as $300 a pound. And when you deduct the cultivation tax of over $161 per pound, that eats up half its value. Part of this price drop has been attributed to the advent of light deprivation weed.

“A large part of the cultivation tax – which was passed from dealer to dealer and was lost in the supply chain,” says Chloupek. “So it never got paid anyway. So in terms of a cultivator’s materialization, an extra $160 per pound of value to help bridge the gap in the intrinsically broken system that we basically have. At its core, it won’t hurt us cultivators who are now dropping like flies.”

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

What companies say

“It’s a fundamentally broken problem,” adds Chloupek. “And they just look at the industry as a doomed cash cow, following the repetitive steps of every major transition industry, from big corporations and Monsanto to a handful of them who have their monopoly on liquor and tobacco to a them, it’s a, it’s a control consolidation to form is what you’re looking at right now. And by intentionally or unintentionally or by thinking, pressuring the industry at such a point, that’s all you do [hurting the people] who have built it in the last 30 years and who are being pushed out of the industry. And unless you’re a half-billion dollar market cap MSO with $100 million in the bank to weather the next 2 years of the storm, or you’re vertically integrated and can barely squeak about your chances of surviving the next 2 up to 3 years are close to zero.”

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

“The survival of the regulated industry is critical to providing ongoing tax revenue to the state and promoting public health and safety. Eliminating the cultivation tax is only one step towards stabilizing our industry, but it is an important step,” said Lindsay Robinson, CCIA Executive Director.

Others say the legislation doesn’t go far enough in terms of social justice measures.

“CCIA has been working to eliminate the cultivation tax for the last four years and we are very proud of this important first step,” added Robinson. “The stability of the cannabis supply chain brings jobs and much-needed tax revenue to the state, while protecting public health and safety and keeping cannabis out of the reach of children.”

While the crop tax cut was a step in the right direction, it was hardly a solution for an industry that still has fundamental flaws.