In early 2020, California Governor Gavin Newsom unveiled his annual budget plan for 2020-2021. The new budget included sweeping changes to California’s cannabis regulatory system. But in light of the far-reaching economic effects of the COVID-19 pandemic, those plans are now on hold. Let’s take a look at how California is considering changing the way it regulates and taxes cannabis and why those plans are delayed until 2021.

New State Budget Announced in January 2020

In January 2020, Governor Newsom released the state’s new budget plan for the 2020-2021 fiscal year. At the time, California was in a strong position financially.

“California’s economic growth has fueled the nation’s economy. As 2020 begins, California’s economy is the strongest in the nation and the fifth largest in the world. We’re eliminating debts, paying down pension liabilities, growing our reserve funds–the largest ever at $21 billion–and one out of every seven new U.S. jobs is in California,” said Newsom in a press release announcing the new budget plan.

With a secure financial foundation, the state budget included provisions to tackle pressing problems facing California including housing affordability, homelessness, and wildfire preparedness.

Regulatory Changes for the Cannabis Industry

Despite California residents voting to legalize recreational cannabis for adult use in 2018, the state’s illegal cannabis market has continued to outpace the legal market. In December 2019, the Legislative Analyst’s Office released a report recommending the state simplify its cannabis tax code and lower tax rates to better combat the illegal cannabis market.

In response, the new budget plan contained changes to simplify the state’s cannabis regulatory system. The proposed changes included:

  • Merging the three cannabis licensing agencies (the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health) into a single Department of Cannabis Control
  • Moving the responsibility for the cultivation excise tax from the final distributor to the initial distributor
  • Moving the responsibility for the retail excise tax from the distributor to the retailer

The new budget did not include any changes to cannabis tax rates, although Governor Newsom remained open to considering changes in the future.

Pressing Pause on Plans for Change

In March 2020, California became the first state in the country to issue a statewide stay-at-home order in response to the coronavirus outbreak. Businesses around the state were forced to close their doors with the exception of those providing essential services including grocery stores, pharmacies, and cannabis dispensaries.

The disruption to the economy caused a gaping deficit in the state’s projected revenue. As a result, the 2020-2021 budget was heavily revised. $143.8 million in funding will still be allocated to the three agencies in charge of overseeing cannabis regulations.

However, the largest reform initiative to combine the state’s cannabis regulatory functions into a single department was placed on hold until 2021. And given the recession sparked by the COVID-19 pandemic, cannabis tax rates are also likely to remain unchanged until 2021.