Weak Legal Marijuana Sales In California Affect State Budget, Illegal Stores Thrive

California is facing the problem of a drastic fall in revenue expected from Cannabis tax after making fantastic projections even as illegal sales are going up unabated.

Concerns over falling tax revenue were revealed in the state budget documents released Thursday.

For the past few months, Gov. Gavin Newsom’s administration has been scaling down projections on cannabis tax revenue through June 2020. In the new projections, the revenue outlook has been slashed by $223 million from what it was four months ago.

Projections and ground reality

California envisaged 15 percent cannabis excise tax to collect $288 million for the year that ends in June, and $359 million the following year.

But the governor’s January budget forecast marks a cut of $67 million and $156 million, respectively,

The state was expecting to collect $1 billion in new tax revenue from the pot but accrual is falling short of big projections.

Finance Department said the excise tax projection had to be slashed after seeing zero growth in the final quarter of 2018. Adding to it was the number of legal outlets to buy pot remaining limited.

Euphoria down on retail pot sales

Many observers attribute this to a shaky rollout of the legal marijuana market framework. The falling revenue accrual also marks the dying euphoria on retail pot sales. Licensed legal shops are affected by a grey market where consumers get away without paying taxes.

Gov. Gavin Newsom now says it takes time for the legal market to establish. It may be an average of five to seven years. But he indirectly blamed local communities for resisting legal sales and opening of outlets.

“We knew (some counties and cities) would be stubborn in providing access and providing retail locations and that would take even longer than some other states, and that’s exactly what’s happening,” Newsom added.

But massive tax revenue to the state was a major selling-point for legalizing cannabis in California. The law called, Proposition 64 won voters mandate in 2016 by promising many programs that would come from tax dollars flowing from pot sales.

Failure in developing the promised digital network

Meanwhile, many industry analysts blame the revenue fall to the state’s own failure in running an efficient digital tracking system despite promising it.

California voters were promised a comprehensive computer platform to monitor all products in the new market. But 16 months later, the system is looking abysmal and shoddy.

“Track-and-trace was one of those tools to define who is operating in the legal market and who is not,” said Josh Drayton of the California Cannabis Industry Association.

Currently, California’s electronic monitoring captures only a tiny fragment of the legal market. The mechanism was meant to work as a seed-to-sale oversight.

As of April 2019, only nine retail outlets are feeding data into the network. Contrast this with 627 shops licensed to sell pot in California.

Among the 4,000 licensed growers, only 7 percent are using the system. Again, out of the 1,000 licensed manufacturing companies producing extracts, oils, and other products, less than 100 are documenting their transactions in the network.