Are High Taxes and Regulations Crippling the Adult Use Marijuana Market in California?

The high taxes and mountains of regulations that recreational cannabis businesses in California face is a subject I’ve covered a couple of times before. It has now been 3 full months since adult use sales became legal in the state, and in that short time there has been a lot of noise made about how much higher the state of CA has made legal marijuana prices for shops that are legally licensed.

I say the “shops that are legally licensed” because by most estimates, the number of unlicensed shops littered throughout the state dwarfs the number of licensed businesses. Those shops don’t face the regulatory scrutiny or pay the taxes that licensed shops do. Add into the mix all of the illegal dealers that operate completely outside the regulatory framework the state has set up for both medical and recreational marijuana and you can easily see the disadvantage the licensed operators face, from growers to sellers.

Reason TV recently took a look at this problem, analyzing a legal and licensed cannabis product from seed to sale in CA. The entire video – “California’s Legal Weed Is So Heavily Taxed and Regulated That the Black Market Might Survive” – can be seen below.

While there is certainly excitement among businesses and consumers over the potential of the legal market in California, that excitement is dampened by the knowledge that there is still a lot of work to do in order to realize even some of that potential.

“The situation in the market is pretty dire,” Kristi Knoblich Palmer, COO and co-founder of KIVA, told Reason TV. “There’s a few hundred licenses…in 2017 there were, maybe, 20 to 30,000 operators, so we’ve seen a significant drop in the number of people to operate in the market.”

Palmer said taxes are a major component of the marketplace, with cannabis getting hit with 4 different taxes as it moves through the supply chain. A grower in the video, Michelle Hackett of Riverview Farms, said her operation needs 16 different cultivation licenses to grow and 2 distribution licenses to transport what is grown.

All of these factors combine to greatly increase the price a consumer will pay for cannabis products from a licensed retailer. As is pointed out in the video, this will cause a lot of people to either buy from an unlicensed shop or a dealer on the black market. That is a lot of potential consumers that will never reach the licensed, regulated market.

Cracking down on unlicensed shops will alleviate the price discrepancy some, and those efforts are already well underway. But as bigger profits continue to draw investment into the black market, easing restrictions and taxes on licensed businesses will be the only way to lower prices enough for the legal market to be able to compete.