6 Years Post Cannabis Legalization In California, What Have We Learned?

Loading...
Loading...

We recently passed the six-year anniversary of voters legalizing recreational cannabis in California. But cannabis businesses in the Golden State aren’t exactly popping the (CBD-infused) champagne. 

What some thought would be a “green rush” has turned out to be more of a slog. Many cannabis businesses are struggling to make it in an industry facing strong headwinds.

What have we learned after six years? Here are three main takeaways.

Taxes Are Too High

Legalizing cannabis was supposed to generate a large amount of tax revenue for worthy programs, such as ones reducing substantive abuse. It has—California has taken in around $4 billion in cannabis tax revenue—but at a cost. 

Legal weed is taxed at an incredibly high rate in California; there is a state sales tax of between 8-10%, a cannabis excise tax of 15%, and local taxes ranging from 5-15%. This means that $100 in pre-tax legal weed can cost almost $140 out the door. California’s tax rate is much higher than that of other states that have legalized weed, such as Oregon, Colorado, and Washington. 

These sky-high rates make it difficult for cannabis companies to make a profit. While Governor Newsom recently froze the excise tax rate at 15% until at least 2025, many in the industry believe further relief is needed. 

The Black Market is Thriving

Legalizing cannabis also was supposed to curb the black market. This has not happened. 

Due to high taxes, the cost of obtaining a license, and the lack of resources devoted to taking enforcement action against illegal operators, the black market is thriving in California. By some estimates, it is two to three times the size of the legal market. 

Many illegal operators get away with a slap on their wrist when they’re caught—they’re able to resume operations nearby in short order. As one Los Angeles law enforcement official noted: “We’re not going to arrest our way out of unlicensed cannabis sales.” 

If an illegal operator can sell much cheaper product with few repercussions, it becomes hard for legal operators to make money. And it’s not just about money—illegal pot isn’t subject to the same testing requirements as legal pot, and therefore poses a risk to consumers. 

Loading...
Loading...

Too Much Weed; Too Few Retail Licenses

California’s cannabis market has a supply and demand problem. 

California was going to put a one-acre cap on cannabis growers. But a loophole allowed growers to accumulate multiple licenses if each was for less than an acre. This led to a handful of companies acquiring a disproportionate share of cultivation licenses and flooding the market with cheap pot. This has made it difficult for growers to make money. 

By contrast, retail licenses are in relatively short supply. California allows localities to opt out of licensing cannabis businesses. Most counties and cities have done so. This means that there are not enough legal dispensaries to serve consumers in certain areas. California has just a fraction of the legal dispensaries per capita of other states that have legalized cannabis. 

Both the oversupply of weed and the undersupply of retail licenses have contributed to the growth of the black market in California. 

Where Do We Go From Here? 

Many cannabis businesses are running on financial fumes and will likely be forced to go out of business or sell to bigger companies. There is no easy solution. But lowering taxes, increasing resources for enforcement actions, and educating consumers about the dangers of illegal pot all would seemingly help bolster the legal market and restore the promise of legalizing cannabis in California. If that happens, then hopefully there will be more to celebrate next year.

 

Loading...
Loading...
Market News and Data brought to you by Benzinga APIs
Posted In: contributors
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...