Re: Opposition to AB 564 and Section 34011.2 of AB 8

Dear Chair Gipson, Assemblymember Aguiar-Curry, and Assemblymember Haney,

On behalf of the undersigned organizations, we write in respectful opposition to AB 564 (Haney) and the proposed Section 34011.2 of AB 8 (Aguiar-Curry), or any budget bill which would go back on the deal made in AB 195 (2022) to adjust the cannabis excise tax starting this year, to make up for the elimination of the cultivation tax.

When voters approved Proposition 64, they dedicated significant Cannabis Excise Tax and Cultivation Tax revenues for the Tier 3 programs, generating at least $150 million per year for childcare for low-income families, youth substance use prevention programs, and environmental remediation including restoration of watersheds damaged by cannabis cultivation. The North Coast has been a significant beneficiary of that funding, with roughly $28 million going to youth substance abuse programs and roughly $42 million towards environmental cleanup and restoration.

2022’s AB 195 eliminated the Proposition 64 Cultivation Tax, among other actions, at the request of the cannabis industry. In response to concerns raised by social and environmental organizations, the Legislature and Governor agreed the ultimate outcome of the cultivation tax repeal would be revenue neutral including establishing a $670 million annual funding target for Tier 3 programs.

We greatly appreciate the Legislature and Governor appropriating $150 million from the General Fund in the 2021-22 budget to help backfill the lost Tier 3 cultivation tax revenues. After mid-2022, cannabis tax revenues declined by over $200 million a year due to a decision to abolish the tax on the cultivation of cannabis in response to industry lobbying. As a result, we saw a steady drop in funds for conservation and restoration.

However, as part of the deal struck in AB 195, the Legislature committed to raising the excise tax on cannabis sales from the current 15% to up to (no more than) 19% this July 1st to compensate for the cultivation tax repeal and restore funding for childcare, youth, environmental and enforcement programs. To put this tax rate in perspective, the tax rate would be equivalent to taxes paid in Oregon (up to 20%) and significantly less than Washington’s 37% rate.

That is current law and will go into effect unless AB 564 or section 34011.2 of AB 8 or other repeal efforts is passed. This increase would mean about $150 million in additional annual funding to protect kids, clean the environment, and enforce the cannabis laws – the amount promised to voters. Of this, 60% goes to childcare and youth programs. The legislated July 1st increase in the tax on cannabis sales is the only reason why children’s advocates and environmental groups agreed not to oppose the cultivation tax repeal in 2022.

When Proposition 64 was approved, voters committed cannabis tax revenues to childcare, youth substance abuse, and environmental remediation programs. Legislative adjustments under AB 195 were structured to maintain revenue neutrality, ensuring that funding levels for critical environmental restoration programs remained intact. Eliminating or reducing the scheduled excise tax adjustments now would break the promises made to voters and stakeholders, directly undermining California’s commitment to environmental stewardship, watershed health, and species conservation.

We warn that beyond a betrayal of voters, revenue neutrality is a necessary component to any amendment of the initiative. Any reduction of tax revenue for Tier 3 programs creates a risk that the legislation will be deemed invalid. In other words, unless it results in revenue neutrality, the elimination of the Cannabis Cultivation Tax is legally vulnerable because: (1) It alters the allocation of funding to Tier 3 programs by eliminating one of the two key revenue streams that fund the Tier 3 allocations; and (2) It would be inconsistent with the voter’s intent expressly stated in Proposition 64’s text to provide significant funding to Tier 3 programs.

We urge you to not support gutting funding for childcare, youth, and environmental programs for the sake of increasing profits for the cannabis industry. Please oppose section 34011.2 in AB 8 or any budget bill language that undoes the increase in the cannabis excise tax. Thank you for your consideration and for your leadership on behalf of our communities.

Sincerely,