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California’s Cannabis Market: Why is it Underperforming? Who is to Blame?

California’s Cannabis Market: Why is it Underperforming? Who is to Blame?

What’s up with California’s cannabis market? If you want to find proof of the economic benefits of marijuana legalization in the news, you can just really throw a rock to get an abundance of information that outlines many stories of success. In Colorado and Washington sales have beat all expectations. In fact, nationwide sales for legal marijuana grew 30%, to the tune of 6.7 billion dollars in 2016, and is estimated to reach 20.1 billion in 2021. Colorado alone has released a study that found thanks to the legal cannabis industry, the state saw a 58 million dollar increase to the local economy. This increase came primarily from taxes and fees. Reports are stating that by 2025, National totals of revenue generated in this way from legal cannabis will total 131.8 billion. 

When looking at these numbers it’s easy to be impressed. If you look at California, specifically, it looks on paper as if the industry is nothing but wildly successful. In 2016 a report suggested California could see 15 billion in total sales, and earn 3 billion from that in tax revenue. 

Fast forward to 2019, second-quarter earnings came in at 74.2 million, with excise revenue coming in at 63.1 million. Initial estimates from Newsom’s office came in at 355 million in total sales for 2019, and those numbers have now been readjusted due to lower than expected sales performance. Newsom’s office has since adjusted that number down to 288 million, and 359 million in 2020 (down from 514 million.) 

So, what’s the deal? Many see California as the shining example of progress when it comes to the cannabis market, so why isn’t it experiencing the turbocharged economic results other states are seeing? 

A recent study in Colorado found that a tax of 30% was too high, in that it did not do enough to stop the black market, they are aiming to reduce to 25% as a result. With taxes so high, there is still a large incentive for black market sales as they can offer the product at a much lower price than legal retail. In California, the issue is even worse, in 2019 Californians were paying upwards of 45% in taxes for legal marijuana, and that number increased in 2020 after a tax hike. California’s own lawmakers are now calling the marijuana industry in the state a “market on the brink of collapse.” Its a surprise, seeing as how it’s been long seen that California would be the crown jewel when it came to the expectations of benefits of legalization. 

While one can understand, perhaps, where lawmakers are coming from, the approach, in practice, thus far seems to be entirely counter-productive toward stated goals. Instead of providing a wealth of tax revenue, sales forecasts are far lower than were previously expected, and a market that was once estimated to bring riches to the golden state is now described by those who watch it the closest as “on the brink of collapse.” 

Newsom has talked about lowering the barrier of entry for businesses trying to get into the market, and that’s a good approach. However, it doesn’t do a lot to stem the core issue, and that’s the fact that people know they can go elsewhere and get the product at a less expensive price. 

And, it’s not as if this black market activity is hidden, it’s there in plain sight. Weedmaps, the popular marijuana app, has been known to host distributors and sellers without a license. While they are taking measures to remove the ads and profiles of accounts without a license, many of them can be easily found on google, yelp, and other platforms. 

But, the problem is not Weedmaps, or google, or yelp. Newsom’s approach to lower the barrier to entry is a good step in the right direction, but if the state of California is serious about seeing the cannabis industry flourish, they need to stop being so greedy with the taxes that are being imposed on business owners and growers. The high tax rate is precisely what incentivizes the black market activity, and what makes it desirable to consumers.

And for consumers looking to keep things on the up and up while avoiding paying an inflated price for their products? Keep an eye on the deals offered by legal dispensaries, they are often eager to get business going and people in the door. For instance, here at delta dispensary, we have a deal every day of the week, and that’s aside from the always valid 10% discount that veterans and seniors receive. 

For the sake of the industry, and the progress of a market that is essentially begging to break out, California lawmakers need to take significant action to reduce the taxes levied on marijuana products and the need to lower the barrier of entry for new businesses. Only then will the industry become the juggernaut that everyone knows it’s capable of being.