The legal cannabis industry was established, in part, to eradicate the illicit market. However, there’s been a disconnect between the lawmakers enforcing rigid rules and regulations and the actual reality of the market, especially in California. Though one of the earliest states to adopt cannabis reform laws, the industry is on the brink of collapsing, according to growers and cannabis business operators. The problem is that law-abiding, tax-paying businesses are dwindling while their illicit market counterparts continue to thrive.
A group of California cannabis advocates and executives issued an open letter on Dec. 17th warning Governor Gavin Newsom and legislative leaders of the imminent dangers the industry faces. A key point made was the cumbersome taxes growers and operators face. They explained the necessity of expanding the number of retail stores across the state to counter the potential collapse and keep the market durable. Additionally, they requested a moratorium on taxes for the next few years.
“Prop 64 was not passed simply to raise tax revenue, but to end the illicit market, protect public health and safety, and create an accountable legal industry,” the letter reads. “Excessive taxation, which compounds across the supply chain, makes our product 50% more expensive at retail than the illicit market. This has created an illicit market that is currently three times the size of the legal market.”
As explained in the letter, the high rates deplete the livelihood of mom-and-pop cannabis operators while simultaneously expanding the market for illicit operations. Profit margins are becoming slimmer for legal operators, yet it’s the black market that’s reaping the benefits. It boils down to the laws that came with Prop 64 in 2016, though there has been a significant economic boost. Unfortunately, that isn’t happening for growers and cannabis businesses who described the state of the industry as a volatile journey, primarily since local governments haven’t worked around state-wide laws efficiently. Industry leaders have filed complaints for months in hopes of turning the fate of the industry around, though illicit sales continue to consume a significant market share.
Californians are leaning towards the black market for a few reasons, but it’s primarily related to prices. The high taxes and regulations have made it hard for operators to compete with black market regions across the state, with cannabis products often being marked 50% higher in retail stores. As Cannabis.net reports, 73% of Californians are purchasing their cannabis from underground sources where products aren’t regulated or tested, turning this issue into public health.
Industry leaders laid out specific demands to legislative leaders to stabilize the current state of the market, which includes expanding the number of retail stores available across California. The needs would help ensure testing to consumers across the state, and hopefully, close the gap in profit margins between the legal operators and illegal operators. Local laws across the state practically banned the sale of cannabis, too, which makes it increasingly more difficult for legal operators to compete with black market prices.
The letter also demanded a three-year break on excise tax. As many anticipated state government taxes to increase at the turn of the new year, pleas from craft growers and mom-and-pop shops highlighted the economic boosts of grassroots operations. California’s craft growers have turned the state into a go-to location for cannabis across the globe which contributes significantly to tourism. However, the increasing taxes are pushing them out of the industry entirely. Growers have requested the elimination of cultivation tax, as well. As of Jan. 1st, 2022, the tax rate on fresh flower, dry leaves, and dry flower have increased.
There’s been positive feedback from politicians, specifically Gov. Newsom, who reportedly supports cannabis tax reforms. Additionally, the governor’s representative Erin Mellon said that Newsom also agreed with the group’s request to crack down on the illegal activity in the market. It’s a broad statement that could also target those who aren’t following compliance regulations (i.e., not using child-resistant containers). Mellon also recognized the excessive taxes that operators face and continue to hinder the cannabis industry’s growth.