California’s cannabis profits have suffered from the unsteady rollout of its legal market. State budget documents released May 9 shows the state government scaling back cannabis tax revenue projections through June 2020 — a $223-million reduction from forecasts just four months ago.
The diminished optimism for retail pot sales comes as shops continue to be undercut by a thriving illicit market, in which consumers can avoid taxes that approach 50% in some communities. State regulators have struggled to meet the demand for licensing, and many communities have either banned commercial sales or not set up rules for the legal market to operate.
Gov. Gavin Newsom has asserted repeatedly that he expects the legal market needs five to seven years to reach its potential. “It takes time to go from something old to something new,” Newsom said. “We knew [some counties and cities] would be stubborn in providing access and providing retail locations, and that would take even longer than some other states, and that’s exactly what’s happening.”
Tax revenue was a significant selling point for legal cannabis in California. Proposition 64, the law approved by voters in 2016, outlined programs that would benefit from tax dollars collected from cannabis sales. State taxes include a 15% levy on purchases of all cannabis and cannabis products, including medical pot. Local governments are free to add taxes on sales and growing, which has created a confusing patchwork of rates around the state.
The market is growing, but it’s slow. The state projects the 15% cannabis excise tax will pull in $288 million for the year that ends in June, and $359 million the following year. That’s a reduction of $67 million and $156 million, respectively, from the governor’s January budget forecast. The state Finance Department reduced the excise tax projection after seeing no growth in the final quarter of 2018.
"Pot Bust: California Dramatically Cuts Marijuana Tax Revenue Projections." Los Angeles Times. May 09, 2019. https://www.latimes.com/local/lanow/la-me-pot-marijuana-tax-revenues-california-20190509-story.html.