I was elected to the California State Board of Equalization (SBOE) in November 2014 to represent nearly ten million constituents in twenty-three counties. The SBOE was created in 1879 by a Constitutional Amendment to "equalize" the 58 independently elected county assessors who in those days were not all assessing, collecting and remitting equally to the state. Today, the SBOE oversees about 35 different tax and fee programs in California, collecting approximately 30% of the state's revenues each year, with the sales and use taxes representing the largest share.
As a Certified Public Accountant and one of four elected members of the SBOE, responsibly managing California's finances is my bottom line. As the state continues on its path to economic recovery, I am concerned about the hundreds of millions of dollars that disappear into an underground cannabis economy that is robbing our schools, public safety and local governments of the full funding they are entitled to.
After more than six months of meetings with medicinal cannabis providers, patients and financial experts, I have come to understand that federal financial laws have failed to keep up with the times and connect communities to much needed and deserved funding associated with the cannabis industry.
The Department of Justice (DOJ) guidelines note that it "has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for personal use on private property." Although not ironclad, this standard provides some reassurance for individual cannabis users. In contrast, however, the DOJ aggressively pursues financial crimes. The federal government is rightly interested in a national standard to regulate large amounts of money flowing through our financial system. Despite some promising news from The U.S. Department of the Treasury last year, all financial institutions across our land abide by the same old, outdated conclusion: It is simply too legally risky to open accounts for cannabis businesses.
Last week, the U.S. Senate Appropriations Committee voted 16-14 to allow cannabis operators access to the federal banking services. This historic vote is on the heels of the Federal Reserve System denying Master Account status to a newly formed credit union in Denver who was prepared to bank the now-legal cannabis industry in Colorado. The Governor of Colorado, John W. Hickenlooper, filed a lawsuit demanding "equal access" to the financial system.
California led the nation by passing Proposition 215: The Compassionate Use Act in 1996. In summary, Prop. 215 required the creation of nonprofit cooperatives that would register with the State Board of Equalization and pay sales taxes on products sold. Last year, in the 23 counties that I represent (from the Oregon border to Santa Barbara), SBOE collected about $28 million dollars of sales tax from the licensed Medicinal Cannabis Dispensaries (MCD), representing about 35% of the MCDs in operation. That means 65% of the MCDs are not paying the sales taxes they owe to the state. When you consider the billions of dollars of economic activity generated by licensed MCDs alone, it is clear that California is getting shortchanged.
However, I believe a majority of MCDs would pay their fair share of taxes, but for the two primary roadblocks that are keeping them from full compliance: fear of prosecution by the federal government and a lack of access to banking and financial institutions.
As of April 2015, twenty-three states and Washington D.C. have legalized cannabis for medical use; seven states have pending legislation related to medical cannabis and four states have passed full adult legalization initiatives. However, the federal government still classifies "cannabis" as a Schedule I drug which is illegal to possess in the United States. As a result, banks and credit unions in California have been prohibited from doing business with any entity that is engaged in illegal activities.
In March, U.S. Senators Rand Paul, Kristin Gillibrand and Cory Booker and nine co-sponsors introduced their CARERS Act, S.683 which would reschedule cannabis from a Schedule I drug to a Schedule II drug, protect state-legal cannabis programs, open up banking to cannabis businesses, and allow cannabis research. If passed, this would alleviate the fear that drives many MCDs to operate "below the radar" of federal officials.
The practical consequences of this conflict between state and federal law was very clear to all the attendees at my banking stakeholders meeting on July 31, 2015. The consensus from this meeting was that until the federal government affirmatively addresses many of the conflicting federal and state laws, California needs to step up and find a creative and feasible legislative proposal to bank the unbanked in our state. One idea worth pursuing is the creation of a State Depository to handle cash deposits and provide for electronic transfers to pay operating bills, taxes, and payroll at a minimum. Over the past several years, there have been several legislative proposals to create such a financial institution. In fact, this model is not a new idea. The state already operates an Infrastructure and Economic Development Bank to finance transportation and sustainability projects. Though it may not be a new idea, it is an idea whose time has come.
This is an important step we need to take for an industry that has been a part of California's economy for twenty years. Keeping an industry and our citizens from fully integrating into our tax system and our financial infrastructure is a lose-lose proposition. It's time we change the equation. While our current political climate may not make it easy, California is poised to achieve another historic milestone. I am pleased to lend my expertise and support to this critical endeavor and ask the public for their support.