Forget the Boston Tea Party. Here comes the California Weed Tax Revolt

Back in 2016, when Californians were asked to legalize marijuana for recreational use, voters were promised that doing so “will incapacitate the black market.”

Obviously, that hasn’t happened. The black market is thriving in California — take a look at the illegal grow operation that copsbusted this fall in San Leandro, where at least 100,000 plants were confiscated.

But in the next few days, a few top cannabis company leaders are threatening to begin a tax revolt they say is directed at saving the state’s $4.4 billion legal cannabis industry. California may be pulling in more cannabis tax revenue than ever — $817 million this year, 55% more than the year before, according to the independent Legislative Analyst’s Office — but many of the Californians who grow and sell the crop are struggling.

First, let’s back up to see how we got here. It starts with how up to roughly 75% of the cannabis consumed in California is purchased on the black market, not from your legal neighborhood dispensary, confirmed David Abernathy, a vice president of Arcview Research, which analyzes the industry.

It doesn’t take an economist to figure out why. Because of the multiple types of state and local taxes levied on legal weed, it can sometimes be up to 100% cheaper to score bud from “your guy” than in a dispensary. And many Californians can’t even do that, because roughly only 1 in 5 cities has a licensed dispensary. Among the cities without dispensaries are Bakersfield and Fremont.

That dynamic of pricey pot and not enough places to buy it outside of big cities hurts cannabis farmers, dispensary owners, workers and everybody else along the legal pipeline that was created to make sure that the herb Californians consume is tracked from farm to table, produced in an environmentally sound way and tested to make sure it is safe.

Plus, it makes cannabis really expensive for those who want to buy it legally.

That brings us to the weed tax revolution about to unfold. Mikey Steinmetz is ready to lead it.

Steinmetz is the founder and chief servant officer of Flow Kana, a cannabis brand, and was at the forefront of the legalization movement. The Mendocino County resident is floating a proposalthat he said could let the legal market catch up.

It starts with eliminating the cultivation tax on growers. It is scheduled to increase on Jan. 1 from $9.65 per ounce of dried flower to $10.08, to keep up with the rate of inflation, in accordance with state cannabis regulations.

“This doesn’t make sense as an industry,” Steinmetz told me on The Chronicle’s “It’s All Political” podcast last week. “We’ve tried it for four years, it doesn’t work. Let’s all get back together and fix that.”

In addition, Steinmetz proposed pausing for three years the 15% excise tax imposed on retail cannabis purchases.

“Three years can give us the amount of time necessary to stand up this industry to fix all the lack of retail problems,” said Steinmetz, a native of Venezuela who was a double major in engineering and finance at Carnegie Mellon University in Pittsburgh before gravitating to the cannabis business. “We have to get customers used to buying other products and coming into legal shops and stop dialing their dealer.”

Steinmetz wants Gov. Gavin Newsom — who led the fight to legalize cannabis in 2016 — to offer these changes in his budget that he submits next month. Keep in mind that California is projected to have a $31 billion budget surplus, according to independent estimates.

Steinmetz said that if he doesn’t see progress from Newsom and the Legislature by July 1, he won’t pay his cultivation taxes. And he said he’s got a group of roughly two dozen other cannabis company leaders who are ready to join him and recruit others. So far, none has publicly confirmed they plan to join him. Steinmetz said “while there are several, some are waiting for (this week’s) news conference to reveal, and I’d rather let them be the ones to share the news.”

Steinmetz wrote in a Medium post that he plans to “to place our estimated tax in escrow in good faith, and to withhold payment until we see real, actionable change. We invite our fellow California operators to join us.”

Yes, that would mean a weed tax revolt in the state that’s home to the Emerald Triangle — Mendocino, Trinity and Humboldt counties — which has long been America’s cannabis breadbasket. Much of the cannabis that’s grown here is illegally transported out of state.

He told The Chronicle on Thursday that “we’re going to be revealing, likely by the end of next week,” a plan for how the group is going to advocate for changing weed laws.

“We, as a company, have had it. Enough is enough,” Steinmetz told me “And as I started talking about this to other folks and other people out there, whether your company was big or small, in the Emerald Triangle in L.A., or an Oakland, everybody is struggling.”

Other cannabis leaders back Steinmetz — even if they’re not quite ready to stop paying taxes. Some fear getting their state licensing yanked if they don’t pay taxes. But some are going to focus on more traditional protest and legislator lobbying.

“I don’t know about not paying taxes. If he gets a critical mass, then we may jump in,” said Erich Pearson, the CEO and founder of SPARC, a cannabis company. He is longtime major player in the industry and owns five dispensaries and a few acres of cannabis farmland in Sonoma County.

For now, Pearson is focusing on regulators in Sonoma County. He is among those asking the Board of Supervisors to cut or suspend the county’s local cultivation tax for three years.

Pearson estimated that the cultivation tax costs farmers roughly “$90,000 for every acre of cannabis in Sonoma County.” They’re paying that a time when the price of the cannabis they grow has dropped to $300 to $400 per pound — down from $900 a pound last year.

And for those who think being a cannabis farmer is all laughs, think again. Pearson estimates it costs roughly $500,000 in fees and consultants to get a permit — and that’s on top of the four years it can take to complete the environmental regulation process that is unlike any agricultural crop.

“I don’t know many farmers in Sonoma County that made any money this year,” Pearson said. “You spend all this money to grow cannabis, and then you lose money.”

“This system, as it is, and I’m not joking,” Pearson said, “is literally on the brink of collapse.”

Yet part of this retro-tax regret was so predictable. The deal that cannabis industry leaders made in the 2016 legalization ballot campaign — after a lot of noisy internal discussion — was to accept high taxes and regulation for the ability to be legal. To be “out of the shadows,” as many put it.

“Cannabis regulation is full of compromises that were necessary because of the sort of entrenched stigma” against weed, said Abernathy, the industry analyst who has testified before the Legislature on cannabis tax policy. “That made for very bad public policy, but was necessary to get those (legalization) policies in place at all.”

One of those legalization compromises was to enable local cities to decide for themselves whether to permit cannabis businesses. Steinmetz wants that provision to be overridden.

Don’t hold your breath.

“I think the rollback of local control is quite unlikely in the near term,” Abernathy said. But he noted that there has been an appetite in the Legislature for reforming cultivation taxes.

Pearson, the longtime dispensary owner and cannabis advocate, said the industry has learned a lot of hard lessons since it emerged from the shadows.

“Back in 2016, and ’17 I think everybody thought that this was going to be you know, the next big thing — and it still can be — but that there was going to be money sort of pouring out of everybody’s pockets,” Pearson said. “And that was just a fallacy. It just isn’t the case.”


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Dec. 12, 2021