California’s big pot payday not so hot so far
California didn’t bring in as much tax revenue as expected during the first three months of legal marijuana sales, with experts blaming the shortfall on the state’s still-thriving black market.
Revenue from cannabis taxes totaled about $60.9 million from Jan. 1 through March 31, according to figures released Friday by the California Department of Tax and Fee Administration. That includes state cultivation, excise and sales taxes. It does not include local tax revenue collected by cities or counties.
That put California on track to take in only about two-thirds of the $185 million in marijuana tax revenue that Gov. Jerry Brown projected in his most recent budget for the first six months of the year, and about one-quarter the $1 billion in annual tax revenue promised by proponents of Proposition 64, the 2016 ballot measure that legalized
recreational marijuana in California.
The slow start frustrated, but didn’t totally surprise, entrepreneurs working to create the newly legalized industry.
“January, February and March were a bit of a sobering time for us,” said Derek Peterson, founder of Irvine-based Terra Tech, which owns Blum dispensary in Oakland and plans to lease a cannabis-cultivation complex near the Oakland International Airport that could produce a metric ton of marijuana a year.
Everyone expected a “significant increase in business” after legal recreational sales started Jan. 1, Peterson said. And, initially, that happened. Sales during the first two weeks of January were strong, with many Californians excited to begin buying legal, recreational cannabis without a doctor’s recommendation. But the rush quickly ebbed, Peterson said, and overall first-quarter sales were “20 to 25 percent softer than what we had anticipated.”
California Finance Director Michael Cohen said during a news conference Friday in Sacramento that there’s a lot of uncertainty surrounding cannabis revenue projections. But he is projecting a substantial increase in taxes in coming months, based largely on what happened in Colorado and Washington after they launched recreational sales in 2014.
“It’s going to show a ramp-up,” Cohen said. “So it’s not surprising that the revenues to date are starting small.”
The reason for the slow start, according to Peterson and others in the industry, is that high taxes and a lack of licensed operators are driving customers back to a well-entrenched black market. And that logjam is keeping many cannabis retailers and others in the cannabis business in the shadows.
So far, fewer than 6 percent of California’s cannabis cultivators, and just 5 percent of its retailers, have made the jump from the black market into the newly legal industry, according to estimates from Hezekiah Allen, executive director of the California Growers Association trade group. Allen said pricey regulations and trouble getting city permits are the main obstacles, with fewer than one in three California cities allowing any kind of cannabis business to operate in their borders.
Another factor is supply. Terra Tech’s Peterson said a state rule that requires licensed vendors to do business only with other licensed vendors is limiting the variety of cannabis products that legitimate shops can offer for sale. As a result, some shoppers are turning to unlicensed stores to get the products they like.
Then there are the taxes, which are causing sticker shock for some shoppers.
All cannabis legally sold in California now comes with a 15 percent excise tax. Cultivators also pay a tax by weight, which bumps up the retail price. Then there’s regular state sales tax, which typically runs between 8 and 10 percent. Also, 57 cities and eight counties have tacked on their own taxes, which range from 2 to 20 percent.
Those taxes apply to legal operators but not black market stores, and prices reflect that. A quick search Wednesday via the online dispensary directory Weedmaps showed the cheapest price for an eighth-ounce of marijuana from a legal shop in Santa Ana at $28 while an unlicensed shop in nearby Anaheim sold similar strains for $15.
Some of those problems are starting to correct themselves as more businesses get licensed, Peterson said. He’s also optimistic that proposed legislative fixes will help.
On Tuesday, a bill that would cut the marijuana sales tax rate from 15 percent to 11 percent and suspend all cultivation taxes until June 2021 unanimously passed the Assembly Business Professions Committee.
Though it may seem counterintuitive, Mark Isidro — a legislative assistant with the office of Assemblyman Tom Lackey, R-Palmdale, who introduced the bill along with Assemblyman Rob Bonta, D-Oakland — insists that cutting taxes will actually boost state revenue by drawing more businesses and shoppers into the regulated market. He pointed to Washington and Oregon, where marijuana tax revenue jumped after tax rates were slashed. And he believes California’s sluggish start to the legal cannabis business will help, not hurt, the tax reduction bill.
State cannabis regulators and economists aren’t yet concerned about the low revenue numbers.
“I think we always knew it was going to be a process to get the legal industry up and running in California,” said Alex Traverso, spokesman for the Bureau of Cannabis Control.