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Why Are California's Legal Marijuana Sales So Low?

Submitted by Phillip Smith on (Issue #1022)
Politics & Advocacy

California is on track to generate $1.9 billion in legal marijuana sales this year, according to new data from a financial analysis firm tracking the market. That's a lot of weed, but it's only half the amount the same firm previously estimated the state would rake in.

The estimates are from New Frontier Data, which crunches cannabis industry numbers, and are based on tax revenues from pot sales, which so far have fallen dramatically short of projections. According to New Frontier, the state collected $33.6 million in pot taxes between January 1 and March 31, which makes it extremely unlikely that tax revenues will meet original expectations of hitting $175 million in the first half of the year.

New Frontier had earlier estimated that the state would see $3.8 billion in marijuana sales this year, and this latest estimate slashes that number by a whopping 50%. The company also slashed its projections for the size of the legal industry by 2025. Instead of the $6.7 billion in sales it earlier estimated, it now says it thinks sales will only hit $4.7 billion, a hefty one-third reduction.

That's bad news not only for state tax revenues but also for an industry that is supposed to be coming in out of the cold. What happened? New Frontier has an idea.

"It is quite clear that the new adult use regulations have made it more difficult than anticipated for the legal market to get established and for consumers to transition to from the illicit market. Given the number of local government bans on cannabis businesses, we are not seeing the same kind of conversion rates that we have seen in other legal markets," said Giadha Aguirre De Carcer, New Frontier Data founder, and CEO.

State and local licensing fees for marijuana businesses can range from $5,000 to $120,000 per year, depending on the type and scope of the business. And complying with regulatory mandates, such as those around zoning, water usage, and lab testing, costs even more.

It's not just onerous -- and expensive -- regulation for those who want state licenses to grow, distribute, and sell marijuana that's the problem. There's also a serious lack of buy-in by a good portion of the state's cities and counties, and that means that a big hunk of the state has no access to local legal marijuana.

"If there's (no governmental support) locally, then there's no option for a state license, and that's why most people are being shut out at this point in time," California Cannabis Industry Association executive director Lindsay Robinson told the Marijuana Business Daily. "The process gave local authorities an option to kind of sit on their hands, and that's the biggest barrier that we're seeing."

According to CCIA spokeswoman Amy Jenkins, only about a third of the state's 540 local governmental entities have approved commercial marijuana activity. Lack of legal access is "forcing consumers to turn to the illicit market," she told the Los Angeles Times this week.

Or return to it. Or stay in it, if they never left. Humboldt State University economics professor Erick Eschker pegged the size of the state's pot market -- legal and illegal -- at about $7.8 billion. Of that, about $2.3 billion came from the medical marijuana market, leaving about $5.5 billion for legal, grey market, and black market pot sales. If the legal market is only accounting for $1.9 billion in sales, that suggests that grey and black market sales are still about twice the size of legal sales. These consumers don't get hit with stiff sales and excise taxes, and if they can still get it from the guy down the street, why pay those high, state-legal prices?

If California wants to eliminate the black market in marijuana, it's got a whole lot of work to do. And no matter what steps the state takes to deal with its internal black market, there's still the export black market to the non-legal states in the rest of the US. Ultimately, the only way to end the black market is to legalize it nationwide, but we're not quite there yet. In the meantime, California's transition to a legal marijuana regime is facing some unhappy realities.

Permission to Reprint: This content is licensed under a modified Creative Commons Attribution license. Content of a purely educational nature in Drug War Chronicle appear courtesy of DRCNet Foundation, unless otherwise noted.


Bob BIteme (not verified)

The tax rate is too high.  None of the other issues matter - until it comes down to the low single digits the black market will rule.

I can see this is a bit of a blind spot in the drug policy movement because so many of us are very progressive and embrace taxes, but they are the absolute devil in this case.  

After alcohol prohibition tax rates had to be set very low, less than 5%, to wipe out the black market.

Thu, 05/31/2018 - 12:32pm Permalink

California may be the stupidist, but all the legalizing states are stupid. As drug policy expert Jonathan Caulkins has pointed out it would make much better sense to allow only non-profit or other non-commercial enterprises to supply cannabis and keep the prices low and distribution carefully controlled. We'll never destroy the black and grey markets as long as the state must tax the product so heavily. What we collect in taxes we spend on enforcment. Our problem with pot is the one we created when we outlawed it in 1937. Foreseebly, the illegal industry became so robust that it is unrealistic for the states to think we can turn the clock back as though we had not made a complete mess of things. Communities are wise to protect their youth by not going along with the commercialization foolishness the politicians now think will solve their budgetary problems. We need a thoughtful redesign of the intelligent ways, such as Caulkins recommends, for making affordable pot available to adults who want it. 

Thu, 05/31/2018 - 4:10pm Permalink
John Thomas (not verified)

We will continue to have wild volatility and a large black-market until we can face reality.

Marijuana is just a plant, with production and market similar to tobacco.  -  The obvious future is the price comes down near that of fine tobacco - at $50 an ounce or less.  And it will end up being sold wherever beer and wine are.  

Until we get close to that reality, the fantasy market will continue unstable and include the black-market.

Thu, 05/31/2018 - 6:14pm Permalink
Greenbrier Rick (not verified)

Our 1st Chief Justice of the U.S. Supreme Court said - "The power to tax is the power to kill". True then and so true now.

Thu, 06/14/2018 - 11:00pm Permalink

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