Something's Gotta Give: Without Cannabis Tax Reform, the Regulated Market Will Be Crushed

Proposition 64 established 27 voter-mandated goals. No less than five of them were about getting rid of the black market.

The voter-approved ballot measure begins with the statement: “It is the intent of the People in enacting this Act… to take non-medical marijuana production and sales out of the hands of the illegal market.” The measure goes on to underscore that the specific intent is “to tax the growth and sale of marijuana in a way that drives out the illicit market… prevent[s] illegal production and distribution of marijuana… [and] reduce barriers to entry into the legal, regulated market.” The voters couldn’t have been clearer. But how’s it working out for California?

The short answer: It’s not.

When other states went from medical-only to a full legalization, the market doubled overnight. In California, the market shrank as “legalization” brought with it crushing taxes and onerous regulations.

In 2017, tens of thousands of California dispensaries, manufacturers and cultivators were operating in compliance with Proposition 215. In 2018, 75 to 80% of those businesses had failed to meet the requirements and costs for state licensing. Those business owners have now either closed their doors and discharged their employees, or they’ve retreated to the black market for the first time in over 20 years.

Some of the hardest hit California counties are those that were once home to a flourishing (albeit loosely regulated) industry under Prop. 215. Sonoma County, for example, had an estimated 5,000 - 7,000 family farms growing cannabis last year. Today, five are licensed. Just five. Some farmers have tightened their belts in the hopes that they can hold on until the regulations eventually loosen up; others have hit the pavement looking for different work; and others have sold off their land. But most are simply returning to the black market for lack of any better choices.

And the customers are going with them.

Facing prices that are as much as 300% higher in the regulated market, cannabis consumers are just saying no. No to product shortages. No to taxes that are as much as 45% of product costs. No to high prices.

So many adults are turning their back on the regulated market that the demographic of dispensaries is changing. Certainly, a growing number of seniors are dropping in for the first time to check out cannabis products for age-related aches and pains. And that’s a good thing given the catastrophic cost of opioids. But the younger adults are increasingly turning to the unregulated California marketplace where the supply is abundant and the weed is cheap.

Assemblyman Tom Lackey’s (R-Palmdale) and Assemblyman Rob Bonta’s (D-Oakland) recently announced bill (AB 3157) addresses a critical issue: cannabis tax reform. At a minimum, it will address the unsustainable price disparity between legal cannabis business and black market sources, and it will do so quickly. In doing so, it gets us a step closer to realizing the promise of Proposition 64.

By taking action now, California will reap the full benefits of a regulated and controlled cannabis market–making it better for public health, for law and order, and for society.

Tiffany Devitt is the Chief Compliance & Information Officer for CannaCraft, Inc., which makes ABX/AbsoluteXtracts and Care By Design.

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