California Governor Gavin Newsom indicated on Monday that he is open to making changes in the state’s taxation of the legal cannabis industry and urged local governments to allow legal cannabis companies to operate in their jurisdictions. After releasing a state budget proposal for the 2022-2023 fiscal year, the Democratic governor told reporters that regulatory changes could support California’s legal cannabis industry while curbing the illicit market.

“It is my goal to look at tax policy to stabilize markets; at the same time, it’s also my goal to get these municipalities to wake up to the opportunities to get rid of the illegal market and the illicit market and provide support and a regulatory framework for the legal market,” Newsome said at a press conference on Monday, and added, “We have a lot of work to do in this space and this year I’m looking forward to working directly with the legislature on reforms.”

Last month, dozens of activists and licensed cannabis operators sent a letter to Newsom warning of a potential collapse of California’s regulated cannabis industry. The group argued that high taxes are making licensed businesses unprofitable and promoting competition from illicit operators. 

In the budget proposal, the Newsom administration projects that the state will collect $787 million over the 2022-2023 tax year, which represents a decrease of about $34.2 million compared to the 2021 state budget. The budget estimates that of the cannabis tax revenue raised, approximately $595 million will be available to fund substance abuse treatment, environmental remediation of illicit cannabis cultivation operations and activities related to public safety.

The proposed budget notes that the Newsom administration supports cannabis reform and plans to work with the state legislature to amend California’s tax policy. The administration also plans to continue developing a grant program “that will aid local governments in, at a minimum,  opening up legal retail access to consumers.”

“We’ve plugged in budget components on the basis of an estimate in January of $787 million, so any reforms need to consider the impacts to those categories of funding and investments, how that gets offset, and we augment that support,” Newsom said when asked to clarify the language in the budget proposal. “It should consider different components of the industry, and reformers have been offered a plug-in, and so I’ll just leave it at that except to say there was intention by having that language in the budget.”

California Budget Funds New Regulatory Proposals

The budget proposal allocates $13.6 million dollars 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 will be spent to create a data warehouse to store the department’s data, processes, and procedures to maintain data integrity, as well as data displays and visualizations for the DCC website. Another $6.1 million will fund a multi-year consumer awareness and safety education campaign.

Blake Schroeder, CEO of San Diego-based Medical Marijuana, Inc., applauded the budget’s investment in cannabis data and licensing systems. But he criticized the overall reduction in cannabis spending, saying “it’s a shame that funds that would typically ensure more public and environmental safety in the industry are being cut.”

“Cannabis has been wrongly deemed the ‘Wild Wild West’ many times before, but there are still safety precautions, and consequences for illicit operators, that must be enforced,” Schroeder wrote in an email to High Times. “We are excited by the state’s renewed commitment to cannabis awareness programs, as this is a large part of our mission as well.” 

But Danielle Dao, founder and co-CEO of California-licensed cannabis operator Eco Farm Holdings PBC, criticized the amount spent on regulators and called for cannabis tax funds to be spent to prop up licensed operators struggling with competition from the illicit market and local bans on cannabis commerce.

“Attempting to operate a cannabis business while 60 percent of the state is comprised of counties that have banned cannabis or created lengthy multi-year processes for licensure reflects a failure from the state to enact a functional supply chain,” Dao wrote in an email.

Before the California budget is finalized, state lawmakers will also submit a proposed budget this spring. Lawmakers will then hold a series of budget policy committee hearings before drafting the final budget bill, which must be passed by the legislature and signed by the governor to become law.

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