Gov. Newsom Seeks Tax Reform To Clamp Down On Illicit Cannabis

Gov. Newsom Seeks Tax Reform To Clamp Down On Illicit Cannabis - Marijuana Packaging

Unlike many other governors, California’s Gavin Newsom is in the enviable position of needing to figure out how to spend a projected budget surplus of $31-47 million. This excess provides him the luxury of proposing billions in new funding for “existential threats” to California’s future, such as climate change, the pandemic, homelessness, economic inequality, and public safety. And, in addition to his plans for funding health care, education, homelessness, and policing, Newsom is advocating changes to the state’s taxation of the legal cannabis industry

In his just-released state budget proposal for fiscal 2022-2023, Gov. Newsom proposes regulatory changes to help clamp down the illicit cannabis market while supporting California’s legal marijuana industry. Additionally, Gov. Newsom encourages local governments to allow legal cannabis companies to operate in their jurisdiction to boost tax revenues.

Newsom said one of his goals is to get local municipalities to understand the opportunities to get rid of the illegal market and “provide support and a regulatory framework for the legal market.”

But dozens of activists and licensed cannabis operators have sent Newsom a letter warning of the potential collapse of California’s regulated marijuana industry. The letter argues that high taxes make licensed businesses unprofitable and boost competition from illicit operations.

Newsom’s budget proposal projects the state will collect $787 million over the 2022-2023 tax year – a decrease of approximately $34.2 million from the 2021 state budget. His administration plans to continue developing a grant program “that will aid local governments in opening up legal retail access to consumers.”

The budget estimates that approximately $595 million of the cannabis tax revenue raised would fund substance abuse treatment, environmental remediation of illicit cannabis cultivation operations, and activities related to public safety.

The budget proposal allocates $13.6 million to fund several proposals for the state’s Department of Cannabis Control, including $5.5 million to develop a unified single licensing system for future cannabis business licenses and the transition of existing licensing data. In addition, $2.2 million would create a data warehouse to store the department’s data, processes, and procedures to maintain data integrity and data displays and visualizations for the DCC website. Another $6.1 million will fund a multi-year consumer awareness and safety education campaign.

Many cannabis industry leaders are pleased and impressed by the proposed investment in cannabis data and licensing systems. But they also have concerns about allocating funds to enforce safety precautions and the consequences for illicit operators.

Cannabis operators are frustrated by the amount spent on regulators. They would prefer to see cannabis tax funds spent to aid licensed operators struggling with competition from the illicit market. With 60 percent of the state comprised of counties that have banned cannabis or created lengthy multi-year licensing processes, a functional supply chain is complicated, if not impossible.

The nonpartisan Legislative Analyst’s Office has recommended that lawmakers appropriate no more than $3 to $8 billion in new ongoing spending and use the rest on one-time expenses that won’t force cuts in the future when there’s less cash available. 

Newsom recognizes that the current surplus isn’t a permanent state. Appreciating the nature of the money available, Newsom has said he wants to use most of the extra cash for one-time spending on areas including budget reserves, pension debt, and the social safety net. 

In a recent interview, Newsoms said he intends to improve education by directing more money toward screenings for dyslexia and adding more funding for early education. He also wants to expand literacy programs through First 5, a state program for kids under 5. 

Newsom will likely put more money toward programs aimed at helping schools deal with COVID and help students make up learning time lost due to the pandemic. But school districts also want more money that isn’t committed to specific programs to spend on their core needs, including staff and facilities. 

To fight COVID-19, Newsom is asking for an additional $2.7 billion to pay for staffing support for hospitals, increased testing, vaccination, and booster campaigns. With California’s total number of hospitalizations dangerously close to the peak of 53,000 during last winter’s surge, the administration is asking for $614 million to pay surge staff at strained hospitals. His total COVID-19 package includes $1.2 billion to increase testing capabilities and provide antigen tests for schools, local health departments, and community clinics. Newsom also wants a bill to expand sick leave for those who miss work due to COVID-19. Previous supplemental sick leave expired last fall.

To help unhoused people transition from living on the street, Newsom wants to “find a bridge to permanent supportive housing.” He also wants to emphasize conservatorships to put those unsheltered people who need it into treatment and housing. His budget proposal includes $500 million to clean up encampments and move unsheltered people into transitional housing.

“Bottom line is the encampments out on the streets and sidewalks are unacceptable. It’s inhumane,” Newsom said. “People are dying.”

In addition to the $12 billion allocated last year, Newsom proposes an additional $2 billion to expand housing and behavioral health care — 55,000 new housing units and treatment slots.

The governor wants to spend an additional $6.1 billion to pivot to zero-emission vehicles, including buses, trucks, and new charging infrastructure for lower-income neighborhoods to combat climate change.  

In addition to the $1.5 billion approved last year, Newsom’s budget proposal includes $1.2 billion for wildfire and forest treatment projects, including prescribed burns, reforestation, fuel breaks, grazing, and new technology to help detect fires earlier.

Newsom also announced that his 2022 budget proposal would also increase funding for cities to crack down on organized retail crime. 

Assemblywoman Cristina Garcia leads the Assembly Budget Subcommittee on Public Safety. She also wants to deter those crimes and hold people accountable, but she wants to verify the specifics. There are essential equity and social justice concerns regarding over-funding police departments.

“I want to see the details and see that the funding is used effectively and not just padding departments,” Garcia said.

California’s governor is constitutionally required to present a balanced budget proposal by January 10. As such, the governors’ annual budget event is essentially a wishlist. Facing a June 15 deadline, state legislators will subsequently hold a series of budget policy committee hearings before the budget is passed by the Legislature and signed by the governor to become law.

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