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Tax Revenue from California’s Legal Marijuana Falls Short of Estimates

Why is California’s tax revenue from legal marijuana not meeting expectations?

A.J. Herrington

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Tax revenue from California’s legal marijuana market fell far short of estimates in the second quarter, state officials have announced. The California Department of Tax and Fee Administration released figures for the period April through June 2018 on Wednesday.

California’s excise tax on cannabis generated nearly $43.5 million in revenue during that time. The cultivation tax generated almost  $4.5 million, and the sales tax generated more than $26 million in revenue. The department noted that sales tax is not collected on sales to medicinal cannabis patients who hold a valid medical marijuana identification card.

The figures for the second quarter represent an increase over the previous one. In the first quarter of 2018, cannabis tax revenue totaled $60.9 million, which included $32 million in excise tax, $1.6 million cultivation tax, and $27.3 million in sales tax.

Officials had estimated that total revenue from cultivation and excise taxes for the first six months of the year would amount to $185 million. But the actual total of $82 million represents a deficit of more than $100 million from state estimates.

Shortfall ‘Staggering’

State Assemblyman Evan Low told the Associated Press that the shortfall is an indication of trouble for Calfornia’s fledgling legal recreational cannabis industry.

“After six months of legal cannabis sales, there is a staggering … gap between today’s tax revenue numbers and what voters were promised,” Low said.

Low added that competition from unlicensed cannabis businesses is responsible for the shortage and called for a change in state regulations.

“Regulators must adapt before California’s lawful cannabis businesses are obliterated by the black market,” said Low.

Hezekiah Allen, the executive director of the cannabis industry advocacy group the California Growers Association, said that legal cannabis is not available to many Californians.

“The situation is pretty severe,” said Allen. “Most of the state doesn’t have access to it. The California marketplace needs significant change if it’s going to function … primarily at the local level.”

Under Prop 64, the initiative passed by California voters in 2016 that legalized recreational marijuana in the state, cities, and counties have the power to ban commercial cannabis activity within their jurisdictions. Many have opted to do so, leaving vast swaths of the state without legal cannabis retailers, cultivators, and manufacturers.

Are Unlicensed Pot Shops to Blame?

The lack of legal shops in much of the state is causing cannabis consumers to turn to the black market, according to data collected by marijuana delivery service Eaze. In a survey conducted by the company earlier this year, 17 percent of California consumers bought cannabis from an unlicensed source in the previous three months “due to local laws that restricted access to legal cannabis,” according to media reports.

Of those customers, 84 percent are “highly likely” to go back to buying from a seller without a license due to “the illicit market having cheaper products and no tax.”

According to a report on the findings from Eaze, black market sources have several advantages over licensed retailers that allow them to charge lower prices.

“Unlicensed retailers do not have to comply with worker protection laws, test products for pesticides and processing chemicals, or remit taxes,” the report noted. “That results in a large pricing benefit.”

State regulators are currently exploring solutions to the lack of access to legal cannabis. A provision that would allow licensed cannabis delivery services to deliver to any address in the state, regardless of local bans, is being considered by the state’s Bureau of Cannabis Control.

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