California Cannabis Sales Growth Could Be Slowed By Onerous Taxes

A new report suggests that the California cannabis market growth may be slowed due to heavy taxes and restrictive regulations. “California: The Golden Opportunity” written by Arcview Market Research in partnership with BDS Analytics writes that even the state’s revenue gains could be affected by the onerous tax and regulatory burdens that will drive consumers to the black market – exactly the opposite of what authorities wanted.

The report stated that the taxes and regulations amount to a 77% handicap versus the prices in the illicit market. California already had high sales taxes and now that is compounded by new cultivation and excise taxes. In addition to that, cannabis businesses are subject to the costs of navigating 40+ different types of state licenses. All of these costs ultimately trickle down to the consumer.

“While California cannabis companies are thrilled with the traffic increase they’ve seen since January 1 they can’t help but worry that regulations and taxes are going to handicap the legal market in the long term,” said Troy Dayton, CEO of the Arcview Group. “It’s clear that every additional penny of a price increase on legal cannabis products only serves to boost the attractiveness of purchasing from the illicit market which has flourished in the state for decades.”

To get an idea of how pervasive the black market is in California, the State Department of Food and Agriculture reported that cannabis cultivators (both legal & illegal) grew 13.5 million pounds of flower in 2016. However, residents only consumed 2.5 million and the rest was diverted to the black market. The bad players have little incentive to abide by the law because as part of the legalization process, punishment for breaking drugs laws have been lightened.

The report said that long-time illicit market customers were shocked when they saw the prices in legal dispensaries. Around 50% of California consumers surveyed in BDS Analytics’ “Public Attitudes and Actions Toward Legal Cannabis” reported buying cannabis from a friend, family member, or acquaintance. This market is big and very much ingrained in the state. Meaning there will be stiff competition between the legal and illegal businesses.

That competition isn’t helped when the legal operators are forking over higher taxes than in Colorado and Oregon with local municipalities adding their own taxes on top. A hypothetical $1,400 pound of cannabis effectively ends up costing $4,054 at retail and puts cannabis businesses at a serious disadvantage to the illicit players who have little overhead costs.

Ultimately the state could be cutting off its nose to spite its face with the extra regulatory and tax burdens. States have mostly legalized recreational marijuana so that they can reap the benefits of huge tax receipts. Cannabis sales in California are expected to hit $3 billion in 2018 larger than the states of Colorado, Oregon and Washington combined. The tax revenue is expected to exceed $649 million in 2018, so this is a significant source of income that the state will want to protect and grow.

While the numbers seem generous, they could be even bigger. The report notes that its forecast puts sales at $7.7 billion by 2021. “That sounds like a lot of growth, and it is, but the forecast is conservative compared to the post-adult-use legalization growth seen in other states. During the first three years (from 2017 through 2020), California’s market will increase at a compound annual growth rate (CAGR) of just under 29%—versus the 84% seen in Washington, 57% in Oregon, and 56% in Colorado during the first three years of adult-use in those states.” Still, the authors believe the politicians will be willing to make adjustments to ensure the success of the program.

“Rarely does a 20-year-old market undergo as radical a transformation in as short a time as California’s cannabis market did on January 1st of this year,” said Tom Adams, Editor-in-Chief at Arcview Market Research and Principal Analyst at BDS Analytics. “Suddenly, 29 million adults had access to the cornucopia of the modern cannabis store but were also suffering sticker shock from the state-imposed costs of going legal.”

On a positive note, the authors of the report believe that medical patients will be excited to see a new range of products available to them in the legal market. They also think that long-time black market consumers will find that the quality of the legal products is better and the options in the legal dispensaries more plentiful. Plus, there will be many consumers who did not want to engage in the illegal market, but now will be comfortable entering a legal dispensary.

In addition to the analysis of the illegal market, the report does a deep dive into all of the complicated regulations affecting the businesses, plus an exhaustive review of the various regions and counties.  It delves into the conflict of the inner state areas not wanting to be a part of the cannabis industry versus the coastal areas that seem to be all in.

 

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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