California Governor Vetoes Bill to Allow Marijuana Business Owners to Deduct Expenses from State Taxes

SACRAMENTO, Calif. (Sept. 24, 2018) – Last week, California Gov. Jerry Brown vetoed a bill that would have severed a link between state and federal tax law, allowing individuals to deduct expenses from legal marijuana businesses for state income tax purposes. Enactment of the legislation would have encouraged the growth of the legal marijuana market in California and further nullified unconstitutional federal prohibition of cannabis in practice.

Asm. Reginald Jones-Sawyer (D-Los Angeles) introduced Assembly Bill 1863 (AB1863) on Jan. 11. Under current California law, the state personal income tax code conforms to federal tax law with respect to itemized deductions and business deductions. Under the federal tax code, individuals cannot deduct business expenses related to trafficking specified controlled substances, including marijuana. As a result, legal California marijuana business owners cannot currently deduct business expenses from their state income taxes. Under AB1863, the IRS code governing expenditures in connection with the illegal sale of drugs would not apply to the carrying on of any trade or business related to commercial cannabis activity by a licensee.

While California marijuana businesses still would not be able to deduct business expenses for federal tax purposes, under AB1863, they would be able to take deductions for state tax purposes just like any other business.

In November 2016, voters in California approved a ballot measure legalizing marijuana for general use by adults and the law went into effect on Jan. 1. Enactment of AB1863 would have removed a barrier facing Californians who want to start marijuana businesses in the state by lowering their tax burden. This would have further incentivized the market and allowed it to expand despite continued federal prohibition efforts.

Passage of AB1863 would have also further mainstreamed marijuana businesses in California. Destigmatizing the marijuana industry would help it integrate more fully into the mainstream California economy.

Gov. Brown claimed his veto of AB1863 was due to budget considerations. In his veto message, Brown wrote, “The bill seeks to apply equal state tax treatment to licensed cannabis businesses in this state, regardless of whether they organize under the personal income tax or corporate income tax law. Given the cost to the General Fund, this proposal is best evaluated as part of the budget process.”

It appears plugging budget holes ranks higher on the governor’s list of priorities than legitimizing and the growing cannabis industry in the state. This seems rather short-sighted considering the amount of money being generated by legal marijuana businesses. It would be far better financially for the state to bring the industry into the mainstream rather than forcing it to operate in the economic shadows.

The Senate passed AB1863 by a 29-6 vote. The Assembly approved the measure by a 64-11 vote. These vote margins make a veto override theoretically possible, but the California legislature has been reluctant to buck a sitting governor. According to the Sacremento Bee, the last time the California legislature overrode a veto was 1979.

“In the decades since the last veto override, five governors, including three Republicans and two Democrats, have gone unscathed.”

According to a University of California political science professor, legislators don’t want to expend the political capital necessary to override the governor. It’s politics over policy.

“A veto override is a full-frontal assault on a governor’s authority, and the cost of taking on a governor, the political cost of taking on a governor, usually far outweighs the policy gain that would come from overriding their veto.”

FEDERAL PROHIBITION

According to the feds, all of these efforts are illegal under the 1970 federal Controlled Substances Act (CSA). Of course, the federal government lacks any constitutional authority to ban or regulate marijuana within the borders of a state, despite the opinion of the politically connected lawyers on the Supreme Court. If you doubt this, ask yourself why it took a constitutional amendment to institute federal alcohol prohibition.

Legalization of marijuana in California removes a huge layer of laws prohibiting the possession and use of marijuana in the world’s sixth largest economy, something that will be extremely difficult for federal prohibitionists to overcome.FBI statistics show that law enforcement makes approximately 99 of 100 marijuana arrests under state, not federal law. By legalizing cannabis, California essentially sweeps away the basis for 99 percent of marijuana arrests.

Furthermore, figures indicate it would take 40 percent of the DEA’s yearly-budget just to investigate and raid all of the dispensaries in Los Angeles – a single city in a single state. That doesn’t include the cost of prosecution. The lesson? The feds lack the resources to enforce marijuana prohibition without state assistance.

A GROWING MOVEMENT

Medical marijuana has been legal in California since voters approved Proposition 215 in 1996. Since that time, marijuana has grown to become the largest cash crop in the state, with more revenue than the next five products combined. The $23.3 billion dollar industry is likely to be significantly larger in the coming months and years.

Colorado, Washington state, Oregon and Alaska were the first states to legalize recreational cannabis, and California, Nevada, Maine and Massachusetts joined them after ballot initiatives in favor of legalization passed in November 2016. In January, Vermont became the first state to legalize marijuana through a legislative act.

With 32 states allowing cannabis for medical use as well, the feds find themselves in a position where they simply can’t enforce prohibition anymore.

“The lesson here is pretty straightforward. When enough people say, ‘No!’ to the federal government, and enough states pass laws backing those people up, there’s not much the feds can do to shove their so-called laws, regulations or mandates down our throats,” Tenth Amendment Center founder and executive director Michael Boldin said.

Efforts to update laws and expand California’s marijuana industry demonstrates another important reality. Once a state puts laws in place legalizing marijuana, it tends to eventually expand. As the state tears down some barriers, markets develop and demand expands. That creates pressure to further relax state law. These bills represent more steps forward for patients seeking alternative treatments and a further erosion of unconstitutional federal marijuana prohibition.

About Tenth Amendment Center
The Tenth Amendment Center is a national think tank that works to preserve and protect the principles of strictly limited government through information, education, and activism. The center serves as a forum for the study and exploration of state and individual sovereignty issues, focusing primarily on the decentralization of federal government power as required by the Constitution. For more information visit the Tenth Amendment Center Blog.

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