The legal marijuana market, so long a twinkle in the eye of the cannabis cognoscenti, has hit hard times in California, where high prices, red tape and competition from the black market have cast a pall over what was supposed to be a triumphant first year of recreational sales.
The cost of legalization was so high in 2018 that hundreds of growers and retailers went out of business, the number of available products spiraled down, tax revenues from sales fell below projections and the black market revved up, according to industry officials and business representatives.
It was, said one insider, “death by a thousand cuts.” And the drip, drip continued this month with the recall of thousands of pounds of marijuana, extracts and products after a Sacramento laboratory was caught faking test results for 22 pesticides over a four-month period.
“The reality is, this isn’t working out the way that anyone hoped,” said Hezekiah Allen, the chairman of Emerald Grown, a co-op made up of about 100 licensed growers mostly north of San Francisco. “It’s looking like some of the worst fears of the (cannabis) business community are being realized.”
Legal sales of recreational cannabis started with great hoopla on Jan. 1 as the state attempted to transform the semi-regulated medical marijuana market into a multibillion-dollar industry. But the costs of setting up, licensing, testing and packaging requirements have proved a heavy burden, and revenues haven’t flowed in as expected.
The year-end tax revenues haven’t been tabulated, but third-quarter figures show California falling well short of the $630 million from recreational marijuana sales that Gov. Jerry Brown predicted in budget documents. As of November, $234.2 million in taxes had been paid to the state in cultivation, excise and sales taxes, according to the California Department of Tax and Fee Administration.
There is reason for some optimism. Tax revenue from sales has improved over the year, jumping from $60.9 million in the first three months of the year to $80.2 million in the second quarter and $93.1 million in the third quarter. But, overall, cannabis sales have been lackluster.
It’s a problem for the state because the tax revenues are used to pay for cannabis research, addiction prevention and law enforcement, including the hoped-for eradication of the illegal market that is siphoning away money.
Many growers, retailers and consumers around the state believe it is a systemic problem, starting with the 15 percent excise tax and snowballing as cities and counties tack on charges.
When all the charges are added up, including cultivation taxes, they amount to about 40 percent of the cost of the goods, merchants say. Meanwhile, the wholesale price for marijuana has dropped over the past year, from around $2,000 a pound to about $500, further reducing profits.
Steve DeAngelo, a co-founder of Oakland’s Harborside marijuana dispensary, said as many as 90 percent of the 500 growers he did business with last year and a dozen “legacy” dispensaries — longtime operators that formed the foundation of the medical marijuana industry — have gone out of business.
“I look back on this year and think of it as the agony and the ecstasy,” DeAngelo said. “On the one hand, it’s the culmination of my life’s work, but on the other hand we’ve seen the destruction of a very special, unique, eclectic and colorful culture.”
The focus now seems to be on making the recreational market viable, but efforts to ease the tax burden, including proposals to cut excise taxes from 15 percent to 11 percent, have gotten little traction.
Meanwhile, growers say, the cost of being in the business is astronomical. Business licenses cost anywhere from $1,205 for a permit to grow 25 outdoor plants to $77,905 for a 22,000-square-foot indoor plantation. Growers and manufacturers also have to pay for lab testing to assure regulators that the marijuana is free of pesticides, chemicals and toxins.