6 Years Post Cannabis Legalization In California, What Have We Learned? –
Greenberg Glusker Fields Claman & Machtinger
12 December 2022
Greenberg Glusker Fields Claman & Machtinger
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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.
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.
This article was originally published by Benzinga.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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