From the outside, California’s marijuana industry looks like a dream come true for Wall Street traders and Sunset Strip stoners alike.
Unfortunately, that’s not the case. California’s marijuana industry is an absolute mess, according to new data from the state.
Last week, the office of Gov. Gavin Newsom (D-Calif.) released state budget documents showing that his administration has cut cannabis tax revenue projections by a whopping $223 million through 2020. Mind you, California has already reduced expectations for cannabis tax revenue on numerous occasions.
The latest budget documents, according to USA Today, call for $288 million in excise tax revenue from cannabis in fiscal 2019, and $359 million in fiscal 2020.
For context, estimates in 2016 following the passage of Prop 64 were calling for more than $1 billion in annual excise tax revenue not long after the full ramp-up of the industry. Thus, California’s marijuana industry isn’t even living up to a third of its long-term potential, according to these new state projections.
There are three primary causes for the Current California Cannabis Chaos:
First, regulatory red tape is making life in the Golden State difficult for cannabis businesses. The state has been slow to review and approve retail and distribution licenses. There’s been little issue getting supply in place, but growers have struggled to get what they have grown into dispensaries in California.
The second problem is that California is absolutely taxing the shit out of its consumers. Aside from having the highest base sales tax of any state in the country, California imposes a 15% excise tax on recreational weed, as well as a cultivation levy of $9.25 per ounce on cannabis flowers, or $2.75 per ounce on cannabis leaves. All told, consumers could be on the looking at an aggregate tax of up to 45%, depending on the city. These added costs make it really difficult for legal channels to compete with the black market.
And thirdly, blame the black market. Illicit growers don’t have to wait for sales permits or cultivation licenses, won’t pay an excise tax, and won’t have to cover state income taxes on their under-the-table profits. The cannabis black market has been around for a long time, and it’s going to take aggressively low tax rates to reduce its stranglehold on California’s cannabis market.
In terms of sheer sales potential, California is still the cannabis king. But given the amount of premium already priced into the industry by Wall Street and investors, these early-stage hiccups could be bad news for pot stocks with a clear focus on the California market.
Long story short, California is going to have to get serious about adjusting its tax policy if it has any chance of uprooting the state’s mammoth black market. Until we see serious tax policy changes, California could be more trouble than it’s worth to investors.