folder Filed in Policy
Fees, Fines and Taxes
Peter Cervieri

Professor Anthony T. Oliveira discusses how fines, fees and taxes will affect the Cannabis legalization landscape. Below is the text from his presentation.

I. Thank you and opening introductory comments:

I want to sincerely thank those that have made my visit and presentation possible today as I truly do appreciate the opportunity. I want to especially thank all those that have opened their doors, businesses, fields, dispensaries, homes, hearts and minds to me this past two and half years of research. I have been introduced to every part of the industry, spoke with hundreds of people and  reviewed thousands of pages of academic, industry, blogs, and emails of information about the industry and those that work within it. I want to especially thank Susan Soares of C.A.R.E. for all the introductions because without her I would have never been able to meet so many people from the industry from one end of the state to the other.

II. Prequalifying the approach for the discussion:

As I begin my observations today I want to preface it by stating I have read the current iterations of AB-243, AB-266 and SB 643, and yet as a market economist I stand by the challenges and potential threats I see that will impede a free market environment and that will cause some degree of market failure going forward. My observations are not just focused on the new approach, compromises, appeasements, and or interpretations of the medical marijuana law and administration thereof, but rather an all-encompassing market place that will exist if and when recreational cannabis is approved by the voters of California. I also want to make it clear that even though I may disagree with some of the actions taken and or proposed, I do strongly acknowledge the efforts of so many trying to do what they think is right for the industry and the communities of California.  Let us always acknowledge the fact that all Californians live in local government and therefore the vested interest by local governments is the heart and soul of California.

I also want to confirm I am not part of the cannabis industry or have I been compensated at any time or in any way by any entity in the last two and half years of my research and observations.

My comments today come from a diverse background of being a farmer, a professor of economics and public policy, and as a 25 year veteran of government service. As a practicing economist and public policy practitioner I typically do research in a way to try and limit bias and rather report what seems to be the facts and or strong opinions about a particular subject by those within that industry or by those that have oversight of the industry. My research into the California Cannabis industry and the prospects of full legalization has taken me on an actual research trip all across California and a virtual research journey across the US and around the globe. I have exerted the upmost effort to limit bias in my work but as a farmer of a number of crops for over the past 40 years, a past CEO of one of the world’s largest multi-national specialty food companies and as a California local elected government official for 20 years, I have a built-in firsthand knowledge of the challenges of farming and governance. Given my background I am going to present information imbedded in academic theory and research today, but I will also step out beyond that and give some personal opinions of the possible unintended consequences or threats that are in the path of the journey to a new and or modified medical marijuana  market and or for recreational use in California. I also want to point out that we should never forget that cannabis begins as an agricultural product and therefore shares all the risks and challenges of a growing crop and like all farmers, cannabis growers are price takers and therefore subject to real and artificial changes of supply and demand in the market place.

III. Defining the market place:

In a free society, a competitive marketplace is composed of many buyers and sellers of goods that are fairly unrestrained to trade on products and services and negotiate an ultimate market price that reaches what we call equilibrium. This is where the buyer and seller reach the satisfactory level of what consumers (the buyers) consider to be a fair price that they have the willingness and ability to pay for, and what producers (growers) need to cover their cost and hopefully be profitable. The real question here is how free and competitive can the California cannabis market truly be, given the possible restraints of intrastate (within the state) and possibly no interstate consumers (across the US)? The current proposed legislative changes will satisfy the concerns of many at the state and local governance level but a number of the changes will impede any chance to have a fair and competitive marketplace. As government imposes more and more restrictions in the market place it will cause distortions to what the ultimate supply and demand equilibrium might be and is further distorted if the grower is disallowed to be competitive by lack of diversification or use of vertical efficiencies. In my opinion, as it is proposed by some right now the new California medical marijuana market stands to be restrained by lack of vertical integration of the grower, market power may be prevalent by those that have the power of distribution, the market will be over supplied by new producers and potential off setting demand diminished by some regional opt outs and the right of local government to tax the “privilege of cultivation etc.”. The other major threat to a large over supply of the intrastate market will be if the current estimated significant amount of out of state sales of California cannabis production are forced back into the intrastate market place, by either policy pressure or stricter state and federal enforcement. This could have a profound impact on local supply and ultimately much lower prices to growers. This of course might be the opposite trend if in fact the restrictions and possible taxation structure forces some growers to the alternative market place.

IV. Defining fees, fines and taxes:

As we think about fees, fines and taxes it is important to first agree that even in a free market place some level of fee and or taxation is acceptable in a democratic society where it is understood that government participation of some limited degree is necessary for services and or oversight to prevent market failures. The definition of a market failure in a free market is when a market fails due to the inefficient allocation of resources. This can be from a number of variables but more typically is from negative externalities such as impacts and costs on third parties such as environmental, other property owners or local government impacts, and or can be where market power causes a failure. Market power is defined where an individual actor or a group of actors in the market have substantial influence on the market place. I believe that research indicates quite clearly too some degree that in particular regions there has been market failures due to environmental impacts (externalities).

Fees:

Fees traditionally in California by both law and policy are to cover the cost of oversight and or impacts and typically are administered at both the state and local levels but tend to have an overarching right, restraint, and obligation by state statute. It is imperative as cannabis legislation, initiative or referendums develop that fees at either the state or local level be specific and purposeful and are not used as a creative revenue source for any agency state or local government. Since local fees are administered by local agencies and therefore budgeted by local elected officials there should be no room for any personal bias to the degree of the fee but rather the amount should be based in law and sound public policy. There are many examples of fee structures that are very equitable and helpful throughout counties in California, especially in agriculture, where the aquiculture commissioner within the county has oversight on all crops in such key areas of herbicides and pesticide use, weights and measures, set back restrictions and protection of people, animals, the environment.

Fines:

I wanted to touch on fines just for a moment here from a civil fine point of view as criminal fines of course are and will be very much adjudicated in the California court system as establish by current or future laws. Again I raise this point as a way of making sure that any civil fines remain in current law with agencies such as the Air Boards, CalEPA, CA Water Board, etc. and that cannabis be treated like any other agricultural crop if in violation in the growing process. Any new civil fine structures must be required by state statute to insure no local agency can be empowered to impose fines outside the statue restrictions. As a past county supervisor no one stands for local home rule more than I especially when it comes to health and safety, but my concern is where personal bias or need for agency revenue, dictates public policy beyond the constraints of statute.

Taxes:

The purposes of a tax on a good or service is typically accepted in the realm of good public policy to; pay for the necessary specific or general oversight of the function of society, to mitigate the externalities of products, services, and uses of private and public goods, and yes to raise general and specific funds to operate local, state and federal governments including education, public safety, infrastructure and the many responsibilities of government in a free society. With a few exceptions most Americans understands the need for some level of taxation and the dispute discussions of taxation usually comes down to the equity and equality in the actual burden and ultimate distribution of the services and benefits of tax revenue. You notice I said a burden of a tax because as an economist there is no questioning that any degree of taxation on a product or service is a burden to the total market surplus. In this case the market surplus is what consumers have left over after they buy the product or service and what the producers keep as a margin after they sell the product or service. You have heard this before in the many writings out there about how taxation causes a deadweight loss to a free market as the revenue collected in taxes is taken from the total market surplus.

It is my belief there is a false assumption by some that California tax payers see that a heavy tax on cannabis will generate positive outcomes either to local and state government revenue sources and or to solve other financial issues within their jurisdictions and therefore such tax proposals are needed to pass legalization. California tax payers by nature are not for excessive taxation or have they traditionally felt comfortable to empower government entities to tax to solve the responsibilities of government. Proposition 13 is a great example where taxpayers rebelled against a somewhat open check book on taxing property values. Even though some tout the unintended consequences of Proposition 13 about the effects of the restraint put on local governments to tax property in their jurisdictions, it is quite evident that it did curtail the runaway evaluations of property taxes in some jurisdictions and pushed taxation strategies in a more market consumer driven taxation strategy by stimulating business commercial and retail activities.

There has been a public  policy standard in California that growers of agriculture products  in general have not been burdened with tax on their products at their level other than property tax increases where capital improvements have been made and have in fact increased the value of their property. This would of course include personal property tax on equipment and supplies needed in their operations. Fees are of coursed charged as mentioned earlier to pay for oversight and possible mitigation offsets. As price takers in what I believe will be an oversupplied market any unnecessary burdens of taxation will force growers out of the market or down another path. I believe than California cannabis at least in the near years will be very sensitive to price increases (elastic) and we should remember that it has a substitute, the black market.

It appears that the overreaching taxing power granted to local governments, proposed in the legislation, will allow the taxation by simple majority in those local agencies if they propose the tax as a general tax, and the tax can be levied against all phases of the cannabis including cultivation.

V. Potential unintended consequences and or threats to the marketplace:

Depending how the eventual legislation and statutes are enacted the following consequences are just a few of the possible impacts of not doing it right the first time:

Fees: The allowed fee structure through lack of understanding or intent could put the California growers, processors, and retailers of cannabis at a disadvantage with other regions, other products, and the black market choice. The fees structure may allow and encourage encroachment of personal bias either against the cannabis industry or to solve existing agency financial challenges.

Fines: Fines that have or can have local bias by administrators, law enforcement, and or public officials will distort the market place and therefore the choices of both consumers and growers.

Taxes: Taxes should be defined and purposeful with very distinct definitions of reason and application that are set by statute and cannot be altered or set by local government. If the taxation is above what is considerable equitable for the defined purpose it will surely drive some consumers and growers to the substitute product which is the black market. In no realm can I consider that any tax structure that puts a “privilege tax” on growers makes any economic or parity since, as they are truly the risk takers and are the unique origin caretakers of the quality and safety of this agricultural product. They should be granted the same reverence and responsibilities we seem to give to all agrarian stewards. We should not punish an emerging valid industry due to the actions of some bad players in the past.

It appears that the overreaching taxing power granted to local governments, proposed in the legislation, will allow the taxation by simple majority in those local agencies if they propose the tax as a general tax, and the tax can be levied against all phases of the cannabis including cultivation.

Market Power: Unless treated like a free market where many buyers and sellers are able to make market choices about what prices are fair and equitable which allows market equilibrium to find its place the market will be distorted. This could easily happen if the structure disallows the growers to have efficiency capabilities and some degree of vertical integration. If the distribution or retail is controlled by a chosen few it will surely cause a degree of market power causing damage to the grower, consumer and ultimately to those seeking tax revenues as the process could cause some degree or total market failure causing a  backlash by legislators, tax payers and or enforcement agencies, including the federal government .