legal cannabis

California’s Legal Pot Industry Is Struggling

Illegal weed distributors are more than holding their own against the heavily taxed and regulated legal outlets. Photo: Rochelle Brodin/WireImage

Whenever family or friends from back East visit me on the Central Coast of California, they expect to find legal pot shops on every corner. Fortunately, I accidentally stumbled on one extremely respectable-looking shop at an upscale strip mall in Carmel, so I can point that out as a local curiosity.

I’m not surprised, though, at the surprise non-Californians express over the less-than-robust legal pot environment. It was, after all, a big and long-expected development when the pot-culture pioneer Golden State finally legalized (by Proposition 64) non-medicinal cannabis sales in 2016. But as the Los Angeles Times reports, the boom in sales and revenues so many expected hasn’t transpired for a variety of reasons:

Two years after California began licensing pot shops, the industry remains so outmatched by the black market that a state panel recently joined some legalization supporters in calling for significant changes — perhaps turning again to voters to address the problems.

In its annual draft report, the Cannabis Advisory Committee warned Gov. Gavin Newsom and California legislators that high taxes, overly burdensome regulations and local control issues posed debilitating obstacles to the legal marijuana market.

With tax revenue about a third of what was expected and with only about 800 of an anticipated 6,000 licensees open for business, the panel said, officials may need to consider “revisiting the ballot initiative process.”

One very basic problem is that Prop 64 empowered local government to ban pot shops in their jurisdictions. As of last May, 76 percent of California municipalities and 69 percent of counties have exercised that option. Legislation to force some accommodation of legal weed has failed so far, as the Times reported:

Assemblyman Phil Ting (D-San Francisco) could not muster the two-thirds vote of the Assembly needed to alter the requirements to prevent cities and counties from banning pot shops. He plans to try again with the bill next year, a representative said …

The measure would have required one licensed cannabis store for every six restaurants and bars with liquor licenses, or one for every 15,000 residents, whichever provides fewer pot shops.

There are currently only 568 licensed legal pot shops (not counting the older medical dispensaries, which have been operating in California since 1996) in the state, as compared to over a thousand in Colorado, which has only 15 percent of California’s population. They struggle to compete with illegal sellers:

Cody Bass said his state-licensed Tahoe Wellness Cooperative has had trouble competing with the unlicensed market when the cannabis it sells is subject to a 15% state excise tax and a 7.75% local sales tax — in addition to the taxes on cultivators that get passed up the supply chain …

Jerred Kiloh, owner of Higher Path dispensary in Los Angeles, said while his business is doing well, layoffs have been widespread among most of the 165 members of the United Cannabis Business Assn., for which he is president.

“Seventy percent of my members have had to do layoffs,” Kiloh said.

Political pressure to fix the system is focused on the best-known Prop 64 proponent, Governor Gavin Newsom:

[Newsom’s] administration plans to consider “substantial system changes” in 2020 to boost the legal market and tamp down on the illicit market, said Nicole Elliott, the governor’s senior advisor on cannabis. The changes will be aimed at streamlining the permit process and “pushing local jurisdictions to understand the benefits of regulation versus continued prohibition,” Elliott said.

The governor is also facing pressure from state legislators and industry leaders to postpone an increase in taxes on cannabis cultivation scheduled for Jan. 1, including a bump tied to inflation that will raise the levy on cannabis flower from $9.25 per ounce to $9.65.

More generally, industry advocates are pushing for regulatory reforms that make it easier for illegal retailers to go legal, and for banking reforms (at the federal and state level) that make it possible to safely store and draw upon revenues in what is now a cash business.

Newsom seems to think that time and minor adjustments can solve much of the legal weed system’s problems, but a fresh ballot initiative may ultimately prove necessary. Finding the right time for that will always be tricky. But fulfilling the promise of wide-open and respectable pot sales in California may depend on it.

California’s Legal Pot Industry Is Struggling