Excessive value | Power metropolis

As 2020 draws to a close, the California pot industry looks back, relieved and annoyed, at a year that should have been filled with big strides, but instead with relatively small profits.

There is relief in the industry because the state saw the pot as an essential business and let it run despite the pandemic lockdowns. There is trouble because the state government, curbed by the pandemic, has not dealt with lowering taxes, easing regulations, or consolidating the three agencies that run the state's top industries into one.

But now that the vaccines are finally shipping, industry insiders are hoping the state will act quickly in the New Year. Of course, "quickly" means something different to California law than the rest of us, and it will likely take a year for meaningful reform to take effect.

In January, the budget proposed by Governor Gavin Newsom aimed to combine the three government agencies into a single entity, the Bureau of Cannabis Control. At the same time, he signaled his willingness to negotiate a significant reduction in the immense cannabis tax burden. Everyone expects – and rests on hope – that they will do the same again on January 20 when they release the proposed New Year budget.

"It's important that it happen now," said Amy Jenkins, lobbyist with the California Cannabis Industry Association, during an online conference last week for the IKNK Brands-sponsored Spark Sessions podcast.

Throughout the year, reforms were discussed "behind the scenes" among industry players, union leaders and groups like the California League of Cities, lawmakers and regulators, she said. Getting the reforms off the ground won't be easy, but the pieces are better aligned than last year around this time, when everyone assumed 2020 will be the year California's pot business can finally thrive.

Today there are three licensing agencies for the cannabis industry: one for retailers, dealers and testing labs; another for breeders; and the third for manufacturers. The division of tasks among these agencies has created mass confusion and enormous costs for the industry.

Jenkins is very confident that agency consolidation will take place this year. The framework for this should be completed by July 1st. After that, the consolidation itself will be carried out in stages that could take several years, she estimated.

The tax problem is more annoying. Most observers agree that the 15 percent excise tax on cannabis should be lowered, but few – even within the industry – agree on what the cuts should be.

Tax revenue was one of the main selling points for legalizing adult cannabis via the 2016 proposal from 64. This not only led the state to opt for a high tax that is on top of normal sales tax, but also too Local governments that impose their own, often high, tariffs on pot sales. A cultivation tax is also levied at the earliest stages in the supply chain and these costs are ultimately borne by consumers.

This has – as many would predictably say – led consumers to the illicit market, rippling pot businesses that are also facing tight margins or even direct losses, largely due to the tax burden.

The most likely outcome in Sacramento will be the elimination of the cultivation tax, or at least a significant reduction. The main battles are over the excise duty.

The puzzle is that regulating the cannabis industry is expensive and requires tax revenues to fund it. There's a “sweet spot” that strikes just the right balance to generate enough to regulate the industry without driving customers away, but no one can agree on what it is.

Still, "cautious optimism" seems to be the prevailing sentiment for 2021.

"We are entering one of the most exciting and transformative years for cannabis," said Jenkins. But only "if we can come together on some important political issues".