Cannabis Tax Bill Clears First Legislative Hurdle

Assemblyman Jim Wood, a Democrat representing the North Coast, has a challenge on his hands.

Because any new tax in California requires the support of two-thirds of legislators in both the State Assembly and the State Senate, Wood’s Assembly Bill 2243, which would impose an excise tax on medical marijuana, needs a green light from a significant number of Republicans or it’s not going to go anywhere.

“We have strong support from Democrats and from the [cannabis] industry. What Republicans want to do is what it hinges on," Wood staffer Paul Ramey said last week. "Can we convince Republicans that their opposition to any tax should stand by the wayside for this cause?”

One of the bill’s most ardent backers, Hezekiah Allen of the California Growers Association, said that in his view the bill “has a pretty decent chance of succeeding.”

One reason he thinks so is simply that this represents the first go-round tax-wise for the medical marijuana business. “It’s an untaxed industry. So [the fees proposed in the bill] are not additional taxes,” he pointed out.

Also improving the bill’s viability is the fact that its co-sponsor, Senator Sharon Runner, whose sprawling district includes the Antelope Valley northeast of Los Angeles, is a Republican.

In a statement issued by her office Friday, Runner said: “California’s medical cannabis industry has a high cost associated with it, requiring California agencies and local law enforcement to combat corruption, marijuana-related crime and environmental damage. I support AB 2243 because I believe an excise tax, if structured the right way, is the best way to address these issues. The medical cannabis industry, and those who use it, should be responsible for these costs, not the average taxpayer.”

In a statement of his own contained in a recent press release, Wood chimed in with this: “An excise tax will ensure the revenue stays in the communities where the cannabis is grown. Our goal is to create resources to manage the environmental and public safety problems we are battling.”

Wood sought Runner out as a co-sponsor because she is considered an influential Republican on tax matters and because her husband is George Runner, a member of the State Board of Equalization, which would administer and collect the tax revenue from medical marijuana should AB 2243 become law. While George Runner hasn’t specifically endorsed the bill, he has indicated that he would be sympathetic to an excise tax on cannabis.

In a sign, perhaps, of Sharon Runner’s clout, Republicans on the Assembly Revenue and Tax Committee did not vote against the excise tax bill when it came before them earlier this month. Instead, they refrained from voting at all, allowing the bill to pass out of the committee on a 5-0 vote.

While Allen acknowledged that, “We need to find folks [on the Republican side] who’ll vote for the bill,” he said that since some of the most conservative, anti-tax Republicans in the Assembly serve on the Revenue and Tax Committee, their decision to not actively oppose the bill meant something.

“Seeing them abstain was a good sign,” commented Allen, referring to anti-tax legislators like Donald P. Wagner (R-Irvine) and William P. Brough (R-Dana Point.)

“As an association,” Allen added, referring to his own organization, “we hope the Republican caucus won’t recommend a position on the bill. [That would] allow for each individual member to come up with their own [position.]”

If a bill proposing an excise tax on pot sounds familiar, it’s because it was part of AB 243, Wood’s bill from last year that ended up getting packaged with two other bills to become the Medical Marijuana Regulation and Safety Act, which the Legislature ended up approving and which Gov. Jerry Brown signed into law.

While MMRSA established a regulatory and licensing system for the cultivation and sale of medical marijuana in the state, it didn’t tackle taxation. That’s because the creation of an excise tax that would generate what was then estimated to be $60 million annually to fund, at least in part, the cleanup of environmentally destructive grows, was dropped. (The latest estimate from the Board of Equalization is that an excise tax on cannabis would generate $77 million yearly.)

At the time, Ramey said the tax was removed so that the two-thirds hurdle wouldn’t have to be met. “It was one thing Jim Wood did to get [the legislation] across the finish line,” he remarked.

Last week, Allen cited an additional reason the excise tax got ditched. It made the overall legislation too much to swallow at one time.

“The bill package was so big, with so many details, [that] the governor’s office said, ‘Let’s do regulation first,’” Allen explained. “It was a lot of policy to make all at once. [The governor’s office] didn’t want to deal with regulation and taxes [at the same time]. It was too much analysis to do too quickly.”

The bill as it currently stands would levy a $9.25 per ounce tax on cannabis flowers, a $2.75 per ounce tax on cannabis leaves and a $1.25 tax on immature cannabis plants from nurseries. The tiered approach is similar to the way alcohol is taxed in terms of potency.

How the tax revenue would be distributed might, of course, be adjusted as the bill makes its way through the legislative process. Right now, 30 percent of the money would go toward the Natural Resources Agency to fund a grant program for environmental cleanup and restoration on public and private lands; 30 percent would go toward beefing up local enforcement; 30 percent would get directed to the multiagency Watershed Enforcement Team, which already exists but is “dreadfully underfunded,” according to Allen; and the remaining 10 percent would support medical marijuana research.

The bill has made for some strange bedfellows — among them pro-cannabis advocates like Allen and politically conservative livestock producers.

Justin Oldfield, vice-president of government affairs with the California Cattlemen’s Association, an outfit that represents 1,800 ranchers across the state, testified on behalf of the bill at the hearing before the Revenue and Tax Committee earlier this month.

On Friday, Oldfield explained his organization’s support. “Illegal grows are widespread on public and private ranchlands that ranchers use to raise livestock. Law enforcement tells us they need more money to put more deputies out in the field. This bill would do that.”

A stronger law enforcement presence would give ranchers a greater sense of security, Oldfield continued.

“I don’t know how many times I’ve heard ranchers say they have come upon grows and been scared for their lives. [The growers] are well-armed and don’t hesitate to defend their sites.”

Oldfield said the fact that a portion of the revenue generated by the tax would be directed toward funding environmental cleanup work is another reason the cattlemen’s association supports the bill.

“Right now, when you have someone on private ranchlands [doing] illegal grows [that cause environmental damage] the money comes out of ranchers’ pockets to do cleanup and restoration,” he explained.

The situation is different if the environmentally destructive grow is located on a public lands grazing allotment, Oldfield added.

“If it’s on public lands, it’s incumbent on [land management agencies] to come up with the resources to do the cleanup. But lots of time they don’t have the money.”

Organizations representing fishermen are also on board with the bill. A California Trout representative, for example, spoke in favor of Wood’s legislation at the committee hearing.

Matt Clifford of Trout Unlimited didn’t testify. But he made clear in an interview last week that his organization, which represents some 10,000 folks across the state, most of them anglers, like the proposed law.

“We like the concept of [tax] revenue having [positive] effects on the environment and on fish and wildlife. It just makes sense to have industry bear the cost,” he said, adding that Wood has shown “great leadership” on the issue.

Clifford said that on the North Coast water diversions and sediment inputs from grows have taken a toll on salmon and steelhead populations, particularly “up in the headwaters of small streams where salmon and steelhead spawn and rear.”

“This is life and death for young salmon,” continued Clifford. He added that maps of marijuana grows and of salmon and steelhead habitat match up to an alarming degree.

Not everyone supports AB 2243. Don Duncan of Americans for Safe Access, a patient advocacy group, said on Friday: “We do understand the need to raise revenue. But the [proposed] taxes are too high and too soon. We are asking lawmakers to wait until next year.”

Saying that “all taxes and fees ultimately impact the price of a product,” Duncan said the bill as currently proposed imposes an “unfair burden on patients.”

“If you tax cultivation and consumption it ultimately means higher prices. [With] a higher purchase price, people will be less likely to participate in the legal market,” Duncan argued.

A representative of California NORML, another cannabis advocacy group, said something similar at the committee hearing, asserting that the bill is counterproductive in that “it will encourage the diversion of marijuana to the untaxed, unregulated adult-use market.”

“The proposed tax is unreasonably high and burdensome to low-income patients who need marijuana for medicine. No other state has a comparably high tax on medical marijuana,” the representative said.

A staff analysis by the Board of Equalization, meanwhile, said that the bill “proposes a complicated tax scheme that could be problematic” and suggests changes.

Even Allen had criticisms. “We have a concern about the leaf tax in particular,” he said, explaining that because cannabis “leaf is ultimately a waste product,” taxing it “creates a disincentive [in terms of] capturing value.”

He also said that his organization “has suggested amendments to a concentrate tax.”

Despite these concerns, Allen said the tax scheme proposed in the bill is “groundbreaking” because instead of simply having the revenue that’s raised go into the state’s general fund, it will be directed toward cleaning up the industry’s environmental footprint.

“It’s the first time that taxes are being used to close the loop on the cost of producing the product. When a consumer buys a gram of cannabis, they will pay more,” Allen acknowledged. But that’s “because they’re paying to ensure that the watershed where the cannabis is grown is healthy.”

“It’s correcting a problem as opposed to just generating revenue,” he added.

The bill is slated to be heard next by the Assembly Appropriations Committee.