The High Cost of Cannabis is in the Taxes

Industry deserves common sense regulatory relief

By Peter Dugré

Greenhouse cannabis farms lining Carpinteria Valley represent some of the most productive cannabis companies in the state of California. Yet, within the City of Carpinteria, cannabis users cannot legally shop for cannabis. The farmers operate outside of city limits in unincorporated Santa Barbara County — with many farms’ property lines doubling as the city boundary. Within the city, retail is banned along with growing personal-use plants outside in residential yards. The regulatory line between county and city serves as a stark representation of the patchwork rules regulating California cannabis since Prop. 64 passed over 5 years ago.

Limited access is one flaw in the regulated cannabis market. The other is over-taxation. When wholesale cannabis prices plummeted in summer of 2021, market instability became more pronounced, leading the cannabis industry and some lawmakers to seriously question whether regulated California cannabis needs some life support in the form of commonsense regulatory relief in order to develop beyond its formative years.

One part of the solution would be eliminating the state cultivation tax, a flat tax unique to the supply chain in the cannabis industry

“The worst of the taxes for the whole industry is the cultivation tax. It is weight-based, so as cannabis prices compress the tax rate increases as a percentage,” said Graham Farrar, Chief Cannabis Officer at Glass House Group, a vertically integrated company operating two farms in Carpinteria Valley. “It is currently $161 per pound. On a $1,000 pound that is 16 percent, but on a $500 pound it is 32 percent. This is a tremendous burden not only on the farmers but on the whole industry which is trying to compete with illegal operators who pay a 0 percent tax rate.”

Contrast the cannabis cultivation tax with other crops, and you find that not only is cultivation tax nonexistent anywhere else in agriculture, many crops actually get tax relief and subsidies, because agricultural returns can fluctuate so greatly that farmers need subsidies to stabilize their businesses and survive lean years.

Of course, the state cultivation tax is only the tip of the iceberg. State annual cultivation licenses for 10,000-squarefeet of greenhouse space cost $11,800 per license. There’s a 4 percent Santa Barbara County cultivation tax applied to gross sales from farms on top of the state tax. Cannabisproducing counties like Monterey and Humboldt have recently reduced or eliminated county cultivation taxes in order to fix the market. Representatives in those counties realized that any percentage of zero is still zero, and building a budget based on inflated cannabis taxes was not sustainable for neither the government nor the farms.

Santa Barbara County has yet to adjust its tax system, which in addition to the cultivation tax, applies a 1 percent tax to distributors, 3 percent to manufacturers and 6 percent to retailers on gross sales. The rough industry benchmark for the portion of gross sales that go to taxes and fees at all levels is a full half of total revenues.

“Now that other counties have lowered or eliminated their cultivation taxes, it makes it that much harder to compete for farmers in Santa Barbara County,” said Autumn Shelton, co-owner of Autumn Brands in Carpinteria and president of CARP Growers. “Our farms in Santa Barbara County are wellknown for responsible and compliant cannabis production, but the costs of the transition to a regulated market are now holding us back and favoring the unregulated.”

New tax revenue was and is a big part of the incentive to legalize and regulate cannabis in the state and across the United States, but with any market there’s a breaking point. For comparison, cannabis tax revenues in California alone in 2020 more than doubled what the state collected in alcohol taxes. Cannabis taxes exceeded $1 billion in 2020. Alcohol taxes came in at $405 million. According to the National Institutes of Health, in 2019 eight times as many Americans reported binge drinking as those who use cannabis just once per month. Far more alcohol is sold and used, but cannabis is seen as the cash cow in the sin tax category. This alcohol and cannabis tax disparity becomes more difficult to comprehend if accounting for the proven usefulness and medical benefits of the cannabis plant.

Carpinteria is not unique in its wait-and-see approach to permitting cannabis dispensaries. According to a 2021 report, 68 percent of California cities banned regulated cannabis retail, leaving the state at just 2.1 retail stores per 100,000 residents. By comparison, Oregon boasts 17 retail shops per 100,000 residents. There are nearly 14,000 liquor stores in California and only 850 brick-and-mortar cannabis shops. In San Jose, population 1 million, there are 16 cannabis shops.

The over-taxation and inaccessibility of cannabis weighs heavily on regulated cannabis businesses while incentivizing a still thriving black market, which according to estimates approaches $8 billion in annual revenue, over double the regulated market.

Market compression in 2021 did not create the push for tax relief but made the need more urgent. Farms around the state in regions competing with each other — from outdoor farms in the Humboldt hills to indoor farms in the Los Angeles cityscape — agree that the current system is not designed to increase participation in the regulated market and in fact stands in the way of the long term success (and sustainable tax revenue stream) of California cannabis.

That’s why 2022 must be the year of eliminating the state cultivation tax and making other adjustments within the supply chain to ensure the survival of the regulated, legal and safe California cannabis industry.

Peter Dugré is the Executive Director of CARP Growers.