Cannabis sales and tax revenues continue to decline in California, falling for three straight quarters according to a recently released report from the state’s Department of Taxes and Fees Administration.
With sales totaling just more than $1 billion for cannabis products, and about $1.2 billion when including accessories, and combined excise and sales tax revenue of about $260 million in the first quarter of 2024, the figures are the lowest they’ve been since the second quarter of 2020.
“The decline has really been severe and significant and goes back years,” Hirsh Jain, founder of Los Angeles based consulting firm Ananda Strategy, told The Epoch Times. “It’s really tragic.”
The decline began in the third quarter of 2023—after sales topped $1.135 billion and taxes exceeded $286.5 million in the second quarter of last year.
A downward trend has persisted since 2021, when sales topped nearly $5.8 billion and tax revenue totaled more than $1.3 billion for the year—with sales in the second quarter setting a record of nearly $1.6 billion and taxes collected surpassing $361 million.
Sales figures sliding could mean fewer people are buying the drug but probably indicates that more people are turning to unlicensed products, according to Mr. Jain.
State and local taxes—which can reach 40 percent or more including sales taxes because excise taxes are calculated on top of local taxes, which vary depending on locality—and strict regulations are to blame, he said.
“Taxes in California are incredibly high,” Mr. Jain said. “And the taxes compound on one another ... a practice that is considered illegal in most states.”
Critics of the state’s existing framework point to tax policies in other states with persistent growth in the cannabis industry—like Michigan, where excise and sales taxes of 10 percent and 6 percent, respectively, are a fraction of the 15 percent and 7.25 percent levied in California—as evidence that high taxes and regulations are hobbling the industry in the Golden State.
With a population of about 10 million, Michigan brought in $290 million in cannabis tax revenue last year—an increase of more than 635 percent since 2020 after dispensaries first opened in December 2019.
Also of concern to some is the current tax structure where Californians with medical prescriptions for cannabis are forced to pay taxes on products, while other states offer exemptions for medicinal purchases while taxing those for recreational purposes.
“It’s just deeply ironic that California, the state that gave birth to the idea of cannabis as medicine, is now treating it like a vice when a lot of these red and purple states are treating it like a medicine,” Mr. Jain said.
Discrepancies in prices of licensed and unlicensed products are also playing a role in declining sales figures, according to some consumers who say the marijuana in licensed shops costs significantly more than similar products available on the street.
“Why should I pay in-store prices that are ridiculously expensive compared to what I can get from a friend?” one Northern California woman, who asked to remain anonymous for fear of retaliation, told The Epoch Times. “I’m on a limited budget, and the taxes are making it where I can’t afford to play by the state’s rules.”
Ounces offered for sale in state-regulated dispensaries can cost as much as pounds being sold on the street, according to multiple sources across the Golden State.
That has resulted in a prevalence in California of unlicensed farmers-market style setups—known as “seshes”—with dozens of vendors selling products direct to consumers and hundreds of buyers typically seen taking advantage of lower prices.
Industry insiders point to the tax burden as a driver of illicit activity on both sides of the equation—with cultivators and consumers choosing to break the law because of excessive taxation.
Given the regulatory challenges, the legal industry is reeling, with about 15 percent of cannabis businesses in default because of unpaid taxes to the state, according to state data. About $732 million in taxes are outstanding, and 72 percent of the money is owed from companies that are no longer in business, according to state records.
Some believe the problem will only worsen in the future, as the excise tax is expected to increase to as much as 19 percent in 2025—based on the language of Assembly Bill 195, a budget trailer bill passed in 2022 which allows for increases to counter the termination of cultivation taxes previously imposed on cannabis products.
Though it is a complex matter that some are now trying to rectify, the majority of lawmakers voted in favor of the existing tax structure in past years—with AB 195 passing on votes of 69–1 in the Assembly and 34–0 in the Senate.
And the influx of billions of dollars in tax revenues since the passage of Proposition 64—which legalized recreational cannabis—has helped the state navigate its significant budget deficit and supplied funding to education and other programs.
Echoing sentiments expressed by other industries in the Golden State, experts are calling for a change to regulatory policy to better serve businesses and consumers.
“Getting cannabis policy right is a careful balance between promoting economic fairness and social equity—with an eye toward the past injustices of the War on Drugs—with a business-friendly tax and regulatory structure,” Jeremy Berke, founder and editor in chief of Cultivated News—a cannabis industry newsletter—posted June 4 on X. “California hasn’t yet gotten that balance right.”
