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.

Here’s what went wrong in California, and here’s how lawmakers in your state can get it right…

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,


Greg Miller
Executive Director, National Institute for Cannabis Investors

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Comments

11 responses to “The Cautionary Tale of Cannabis in California”

  1. It’s not a surprise that California is having such difficulties, let’s face it California can and usually does screw up a golden opportunity! Hopefully the other 2 liberal states (NY &NJ), are not as dumb!

  2. Sounds like the classic investing mantra: Markets are driven by ‘fear vs. greed’. Some communities fear cannabis, others go for the greed [excessive taxation]. Some moderation looks like the right avenue. Bound to be growing pains with an infant industry.

    On a different note Greg, we appreciate how you really dig into a company’s inner workings. Warren Buffet once described three essentials of a successful CEO. They have to be hard working, smart, and must have Integrity. The first two are meaningless without integrity.

    What are we going to with our profits on HEXO? Well, I don’t know about you, but I need to set aside some cash to pay next years income taxes on those Whopping Profits you gave us! [what a complainer, eh?] Keep up the good work Buddy.

  3. It is so sad that the rationale for legalization of cannabis is always “the state will get boatloads of tax money” rather than “it will diminish the disastrous war on drugs”.

  4. why dont they just chg 7% period ? 4% to state, 3% to local ! Everyone should be able to live with that. Come on with legalizing Texas!

  5. Good afternoon Greg it figures just when we are starting to move in the right. You can always count on the people of power to be greedy and unethical!!!! But I guess that’s the American way!!!!

  6. Typical California. Excessive taxes, excessive regulations`. I wonder if the socialists will add FREE POT to the “GREEN GIVEAWAY” They are selling to the public ?

  7. What would be the reason for not allowing either a CBD oil or a CBD cream to be shipped or brought over the U.S. border and into Canada? Shipped by a reputable, recognized company that produces and distributes in the
    U.S. and is on the verge of being allowed to export to Canada but held up, by whatever authority is responsible for the restriction or just a hold up?

  8. California will set the standard as we out here in the golden state have been going to dispensaries for 15 plus years now. California is and always will be the cannabis capital of the world market share wise. Whatever happens, Cali will do it first and lead the way for America and the world. So lookout for what happens in the golden state first, so the rest of the world can follow suit.

  9. High, I agree, with you Greg, if Calif wants to compatibly compete with the long established black market, they will have to lower the tax rates, and change from a dual license to a single State license requirement .
    I would give them a break , to work all this out, they belong to the first of States that legalized Cannabis, and are subject to be the first in developing the sale and availability of Cannabis, which is a Huge turn in present laws and public acceptance .

    Here in Pennsylvania, we are looking forward to New Jersey passing legal legistration.!

    Thankyou Greg for your Expertise in Cannabis and Advice in the Investment opportunity it represents.

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