California cannabis regulation hasn’t gone smoothly. But if states can avoid two key mistakes, the marijuana market will flourish…
To say legal cannabis sales in California have been disappointing is an understatement. The first full year of recreational legalization brought in a little over $350 million in taxes, well short of the projected $643 million.
The black market is still flourishing in the Golden State, and cannabis entrepreneurs are having a hard time getting their businesses up and running.
That’s the bad news.
The good news is that I still believe there is time to right the ship, and we are starting to see that in what I like to call California 2.0.
On top of that, I believe lawmakers in other states can look to the troubles in California and learn what not to do. The perfect examples are New York and New Jersey, which I just wrote about yesterday.
If Governors Andrew Cuomo (NY-D) and Phil Murphy (NJ-D) can get this right, these could be two huge cannabis markets.
The winning playbook is out there for cannabis regulations, and politicians and lawmakers just need to be able to execute on it.
What Went Wrong in California
One of the problems in California is dual licenses – the requirement of having permission from the state and the city to operate.
“I think we all wish we could license more businesses, but our system is based on dual licensing and local control,” said Alex Traverso, a spokesman for the state Bureau of Cannabis Control, said in a statement.
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As of December 2018, fewer than 20% of cities in California allowed retail shops to sell cannabis for recreational use, according to the California Cannabis Industry Association.
With such restrictions, only 547 temporary and annual licenses were given to California dispensaries and cannabis retail stores. State officials estimated there would be 6,000 licensed shops in just a few years, so they have a long way to go.
And for cannabis growers, it’s been no picnic working with California regulators. In the first year of legalization, a little over 2,000 growers were registered with the state. That’s far below the estimate of the 5,000 commercial growers that were expected.
On top of too much red tape, the taxes on cannabis are out of control.
Unreasonable Taxes & Fees
Javier Montes, the owner of Delta-9 THC in Wilmington, California, told the Los Angeles Times that he has to pay a 15% excise tax, a 10% recreational marijuana tax to the city of Los Angeles, and a 9.5% tax in sales to the county and the state.
The excessive taxes and fees could drive up the cost of legal cannabis in some parts of California to as much as 45%, according to credit ratings firm Fitch Ratings. In Oregon, for example, state and local taxes are capped at 20%.
With taxes so high, that means cannabis users stick to the black markets. Not only does that hurt sales for legal cannabis operators, but local and state police still have to focus on stopping illegal marijuana transactions.
In the end, with a complicated framework and too many taxes, no one wins. The consumer turns to the black market, dispensaries go out of business, and the promises politicians made with what they would do with the tax revenue from legal cannabis go unfulfilled.
Learning from California’s Mistakes
I’m hopeful New York and New Jersey can learn from these lessons, and I still believe California will get its act together.
Remember – an effective cannabis regulatory framework allows for more legitimate companies to enter new markets. Dispensaries can expand from just a handful of locations to dozens or even hundreds when a state knows what it is doing.
And when more startups can get up and running in a timely manner, we will see more cannabis IPOs we can play for massive profits.
Thanks for being an integral part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
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11 responses to “The Cautionary Tale of Cannabis in California”
February 28 2019