In the decades leading up to cannabis legalization in California, cannabis activists have levied the tax revenue potential of legalization as the tip of the spear for its campaign. The idea was rather simple in concept: if we legalize cannabis and tax its sales, a plethora of revenue would become readily available to fund California’s education system and other social endeavors like roads and public works.
While at first glance $1 million dollars in daily tax revenue seems like a tremendous feat, the expectations were actually much higher. Federal and State Government analysis initially projected that California would be funneling next to $1-billion in tax money annually from the legal pot economy. Even though California pulled in roughly $74 million in cannabis tax revenue between the months of April and June-2019, Governor Gavin Newsom had to sharply scale back projected tax dollars from the legal cannabis market.
That being said, before anyone is quick to anoint $1 million daily revenue as tremendous or the other side criticizing the feat as a complete failure; it is prudent we understand the different elements that have affected the legal cannabis market tax revenue. After all, the cannabis legal market is just taking its first steps into the American economy. Where it crawled for decades as an illicit criminalized product that had to go through many years of medical status.
There are several problems for example that are just out of the cannabis market’s hands. Being such a new legal market means still being in competition with tax-free illicit marketplaces. And these illicit marketplaces don’t just come in the form of your neighborhood pot dealer, but non-licensed trap shops and delivery services that do not report to the state.
This is partly due to the fact the state and local governments have been relentless in terms of the red tape they have placed on cannabis shops and delivery services in general. If you have spoken to anyone working in the cannabis industry, they will tell you the hurdles and regulations they have had to jump through. Many of these hurdles require shops and services to finance testing and other state required items that can place a financial burden on the business. However, that is not to say these regulations and hurdles are unnecessary; rather that there is a tremendous amount of protocol for a new industry creating its own legal landscape. Cannabis is consumed, the service is a business of people, the State wants to keep these people safe and ensure the longevity of an industry with tremendous potential. This does mean tension and friction between two parties who both want the same thing but are not always on the same page on how to do it.
For instance, last month a new ruling in the California Supreme Court created a significant obstacle for the expansion of legal cannabis. The court ruled that San Diego failed to adequately analyze the potential environmental impacts of its dispensary law, a decision that is projected to have an effect across the State’s local government actions. The cannabis industry knows adding another layer of environmental review has the potential to slow down legal expansion. The California Supreme Court ruled that San Diego should have analyzed in depth, whether the increase in dispensaries would result in the construction of new buildings and or create change in the citywide vehicle traffic patterns. At first glance, that seems like a completely rational claim. It makes sense local governments should be able to see the foreseeable impact any business has on its community. But legal cannabis has their own rational counter-argument having been in competition with a cannabis marketplace still dominated by illicit and illegal purchasing. Legal cannabis service owners are hoping the State understands that allowing convenient access to legal cannabis is an effective way to combat the illicit marketplace. Increasing the already steep cost of opening a cannabis business in California, also provides a sharper advantage for deep-pocket licensed applicants to gain control of an obtuse portion of the State’s emerging legal market.
Even with all these court dramas, it’s not just the State who is responsible for California’s failing to reach its initial projected tax revenue. There are also still large pockets of communities that are fighting against or simply are resistant to legal sales of cannabis. These elements alongside an initial shortage of licensed dispensaries and a supply chain developing itself under fire, conspired to depress early sales and businesses operating under legit, legal tax code laws. While, California State pot taxes include a 15% levy on all cannabis and cannabis product purchases (including medical cannabis), local governments are free to add taxes on growth and sales; creating a sometimes confusing maze of rates in California.
According to the state Finance Department, the fiscal year ending in June tallied $317 million. The revenue was $29 million above the revised projection for the year. Reports have also said these numbers are preliminary and could be revised after initial reports projected that the legal cannabis market would grow 23-percent in 2018.
Industry advisors Arcview Market Research and BDS Analytics have projected the legal market would climb to a whopping $7.2 billion by 2024. In comparison, the illicit market would drop to $6.4 billion by 2024.
There still exists a tremendous amount of enthusiasm for the expansion of the legal cannabis market. Considering less than a decade ago it was only medical cannabis creating any sort of tax revenue. Another decade or two prior to that there was literally no inkling of a legal cannabis market, let alone tax revenue. The cannabis industry has some of the most innovating minds in the world. Surely ten years from now, we can expect a lush tax revenue stream in California, and possibly the entire US. That means more money for schools, roads, social programs, and an overall healthier, stronger economy as a whole.Â
