The escalation of taxes on cannabis products has ignited a clash between child care proponents and an unlikely adversary: the legal cannabis sector.

As of July 1st, California raised its cannabis excise tax from 15% to 19% in 2022 to stabilize its burgeoning legal market. However, industry representatives argue that this hike is too steep, particularly as they face plummeting revenues and stiff competition from the illegal market.

A bill backed by the industry, which has already passed in Congress, aims to eliminate tax reductions and revert the rate back to 15% for a span of six years. This decision means a drop in tax revenues that typically fund law enforcement, childcare, at-risk youth services, and environmental clean-ups.

This shift could lead to approximately $81 million in annual losses, specifically affecting funding for about 8,000 subsidized childcare spots for children from low-income families.

“They’re prioritizing the cannabis industry over the needs of kids and young people,” commented Mary Ignatius, the executive director of California’s foreboding.

Childcare is facing a retreat

The friction between tax dynamics in the legal cannabis and childcare sectors, both in crisis, underscores the pitfalls of relying on “sin taxes” from products like alcohol, cannabis, and tobacco to fund crucial social services.

The next step for the measure is the Senate, with all legislative actions in Congress expected to conclude by September 12th, and the governor’s signature required by October 12th.

“It’s possible to support both the legal cannabis industry and childcare. If the bill reaches the governor’s office and is approved, we’ll collaborate with Congress to ensure childcare funding remains unaffected,” said a spokesperson.

Yet, with the nation focusing on reducing fiscal expenditures and cutting federal funding, it’s unclear how the losses will be compensated.

While funds from the cannabis tax represent a small fraction of California’s $7 billion annual childcare budget, federal cuts to social services for low-income families, including Head Start, alarm child care advocates, who feel the state should explore better revenue options to mitigate potential losses.

“Every dollar must stay in the program that supports our children and families,” Ignatius stated, echoing the sentiment of numerous advocates.

In the past decade, child care advocates have made strides to rebuild a sector that was severely undermined during the Great Recession. California has increased its childcare spending, adding around 150,000 subsidized spots and eliminating fees for families, while also enhancing employee wages and launching new public school grades for four-year-olds.

Despite these advancements, challenges persist—low worker wages, high family costs, and a lack of available spots for infants and toddlers remain critical issues. There’s still an extensive waiting list for subsidized childcare, leading some parents to label it a “hopeless list,” as they might wait years for vacancies to open up, often after their children have already entered kindergarten.

Jim Keddy, who serves on the Advisory Board, is an advocate for tax-funded programs and stands against proposed cuts.

“If you’re not actively working to ensure funding for your kids, you risk having it taken away,” said Keddy, also the executive director of Youth Forward, an organization focused on youth advocacy.

However, the cannabis industry insists that while taxes can support benefits, the industry’s plight is dire.

Legal cannabis industry struggles to float

“It’s unfortunate that the cannabis sector finds itself at odds with social initiatives, particularly those for children,” remarked Geler Kiro, president of the United Cannabis Business Association and owner of Sherman Oaks’ Hightarpass Dispensary. “As our legal industry continues to falter, the tax revenues decline as well.”

In 2022, sales peaked when the cannabis industry agreed to a tax hike, alongside the elimination of the cultivation tax brought in by Prop. 64, the 2016 legalization initiative. But since then, sales have dropped to the lowest they’ve been in five years, mainly due to the illegal market siphoning revenue from licensed sellers.

In Los Angeles, Kiro noted that legal buyers face a hefty tax burden, amounting to 47% at purchase, while illegal sellers avoid this tax entirely.

“A 30% hike on an already crippling excise tax is the breaking point for many,” Kiro added.

Before the tax increase, only 40% of cannabis consumed in California was sourced from the legal market, according to the California Department of Cannabis Control.

Legislation aiming to reduce excise taxes, AB564, has garnered support from various Congressional members, including advocates for early childhood education like Congressional majority leader Cecilia Agia Curry (D Winters).

“With revenues from legal cannabis sales already declining, further tax increases will only exacerbate the situation. These hikes penalize responsible cannabis businesses and make illegal sales more appealing,” she articulated. “Although we need to fund educational initiatives for our children, cannabis taxes can only be effective if we stabilize the legal market and target illegal operations.”

How reliable is the tax on sin?

Researcher Lucy Dadayan from the Tax Policy Center in Washington, D.C., studied the challenges inherent to sin taxes and noted California’s dilemma is a prime example.

“If a sin tax works and consumption decreases, the tax base inevitably shrinks. With cannabis, higher rates could push consumers back to the black market, further decreasing revenue,” she explained.

This isn’t the first instance of state services for children being adversely affected by sin tax cuts.

A notable case occurred in 1998 when California voters imposed a heavy tax on cigarettes to encourage smokers to quit. The revenue was then allocated to “first five” initiatives aimed at improving child health and well-being. However, as smoking rates decreased, the budget for early childhood programs shrank, putting the “first five” system at risk due to dwindling funds.

Moreover, essential services like childcare that rely on sin taxes often end up being more costly, leading to discrepancies in tax structures and funding requirements, Dadayan noted.

“In the short term, these taxes generate substantial revenue and garner public support for legalization. However, over the long haul, they may leave crucial programs vulnerable as consumption patterns shift,” she concluded.