Why the World's Largest Cannabis Market Is Struggling, and What Can Be Done About It
Shooting themselves in the foot.
Taxes in California are among the highest in the United States and that of course includes cannabis-related taxes, which are so exorbitant that they are hobbling what should rightly be the country's - make that the world's largest and potentially successful cannabis market.
High taxes and onerous regulations are keeping unlicensed cultivators out of the legal market and contributing to illicit sales, which make up whopping three-quarters of all weed sales in California today, according to a new study done by Reason Foundation, Good Farmers Great Neighbors and Precision Advocacy.
Taxed at a flat rate of about $161 a pound, on top of which there is a 15% excise tax, as well as local cultivation, manufacturing, processing, distribution and retail taxes. As a result, California raked in nearly $1 billion in cannabis tax revenue during the first three quarters of 2021, yet the cannabis industry is drowning.
Cultivation tax has to go
"High taxes are undermining California's legal cannabis market," says Geoffrey Lawrence, director of drug policy at Reason Foundation. "California could double monthly cannabis tax revenues by 2024 by eliminating the cultivation tax. Without the cultivation tax, our data show lower cannabis prices would increase sales of legal products, increasing the state government's general sales tax revenue and more than replacing losses from the eliminated cultivation tax."
The market is stunted
Due to exorbitant taxes, California's legal cannabis market has not come anywhere near to meeting its expectations in terms of size. Indeed, the market is just one-third the size of that which was expected, based on its population of around 40 million and high adult weed consumption rates.
That is to say, nearly two-thirds of cannabis sales in California are still taking place on the illicit market, the study estimates.
Weed taxes compared to neighboring states
California's state and local taxes on legal cannabis are as high as $90 per ounce, or $1,441 per pound. By comparison, cannabis taxes average $340 per pound in Oregon and $526 a pound in Colorado.
Due to these lower taxes and greater access to legal products, residents in Oregon spend 378% more per capita on legal cannabis. Colorado residents spend 335% more per capita on legal cannabis than Californians spend, the report showed.
"We are experiencing first-hand a serious price compression in the California supply-chain in part as a result of the illegal market, high taxes and fees and a patchwork of inconsistent local taxes driving legal operators to the brink of a financial cliff," said Amy O'Gorman Jenkins, president of Precision Advocacy and legislative advocate of the California Cannabis Industry Association. "We cannot allow the largest cannabis market in the world to fail."
Farmers face biggest challenge
"Many farmers are considering going fallow this year. Busy Bee Organics, one of the first woman-owned, sun-grown farmers in Santa Barbara, has already declared she's not planting this year," said Sam Rodriguez, policy director of Good Farmers Great Neighbors.
"The immediate elimination of the cultivation tax would be a first step in addressing critical issues impacting the state's legal cannabis market from seed to sale," Rodriguez said.
Another shocking statistic
Oregon (pop. 4.2 million) has one legal cannabis retailer for every 6,145 residents (some say the highest per capita in the world!). Colorado (pop. 5.8 million) has one legal retailer for every 13,838 residents while California has just one legal cannabis retailer for every 29,292 residents, the study found.