How California’s legal marijuana market wound up in crisis mode after two years

(This is the second of three stories marking the two-year anniversary of the start of legal recreational cannabis sales in California. Part 3 will examine what industry insiders believe the future holds for the state’s marijuana industry. The first installment, which investigated the overall impact of the illicit market on California’s legal cannabis market, is available here.) 

Most industry watchers agree that California’s legal marijuana market problems stem from three main factors, which are intertwined:

  1. A dual licensing system that requires local municipality authorization before businesses can obtain a state marijuana permit.
  2. High taxes that shrink profit margins and drive consumers to the illicit market.
  3. The ongoing success of the illegal cannabis market.

Local control and bans, along with high taxes, have combined to offer those working outside the legal framework an opening to exploit: They can continue selling at a lower price point than licensed retailers and without much overhead.

Oakland-based cannabis consultant Luna Stower – and others with established roots in California’s 24-year-old medical marijuana market – saw much of this coming in 2016, when Proposition 64 was on the ballot to legalize recreational cannabis in the state.

Stower was worried the new state law would create a “bastardized version” of California’s extensive MMJ market.

“I knew what Prop 64 would do was effectively kill the traditional market. … All my friends and family voted against it,” Stower recalled. “I had a ton of dread and trepidation, and it was worse than I could have ever expected.”

Two years into the new legal MJ market, Stower’s fears have largely come to pass.

She became one of many employees laid off in the industry last year when she lost her job with Jetty Extracts in Oakland. However, Stower still does contract work with the manufacturer.

All these challenges combined raise questions about what went wrong and why, and how might the industry map a strategy forward?

Local power equals ongoing prohibition?

Local governments in California can regulate the marijuana industry as they see fit – or simply ban it from operating within their borders.

“Legalization was avoided by having local control in Prop 64,” said Kenny Morrison, president of the California Cannabis Manufacturers Association. “You can’t even call it legalization when more than 70% of the state doesn’t (allow for marijuana retailers).

“That’s legalization looking more like prohibition. That’s pseudo-legalization.”

But was local control avoidable? The answer isn’t clear, and neither is the path around it.

Before California launched legalized adult-use sales in January 2018, and even a year after that, medical marijuana collectives could operate without fear of criminal prosecution.

But local officials have pushed back on cannabis industry growth in California for years, even before the state Legislature passed an MMJ regulatory structure in 2015.

Local control was a key priority for the California League of Cities, which represents various municipalities in lobbying efforts at the state Capitol in Sacramento and in many political campaigns.

So when the California Legislature finally approved three bills on Sept. 11, 2015, to regulate the growing cannabis industry – collectively titled the Medical Marijuana Regulation and Safety Act (MMRSA) – local control was an important element.

That framework became the foundation for Proposition 64, formally known as the Adult Use of Marijuana Act (AUMA).

The local control written into MMRSA also reflected California case law that had already established municipalities’ rights to ban medical marijuana commerce.

That meant the drafters of MMRSA and Prop 64 had to write a proposed law that wouldn’t get thrown out by the courts for preempting home rule authority, said Max Mikalonis, a legislative advocate at Sacramento-based K Street Consulting.

One of the triggers in MMRSA was a requirement that localities enact MMJ regulations by March 2016 – just a few months after the law passed the Legislature – or state regulations would take precedence. That led directly to the first wave of local industry bans, Mikalonis recalled.

Local control also was adopted by the Prop 64 drafters to head off a political opposition campaign in 2016 by the League of Cities against recreational legalization, said Nate Bradley, who worked closely with the Prop 64 campaign as a co-founder of the California Cannabis Industry Association (CCIA). He’s now the executive director of the Cannabis Consumer Policy Council and is not affiliated with CCIA.

Tax origins

When MMRSA was approved, one of the most vital unsettled issues was how the state would tax medical marijuana.

On the same day that MMRSA passed, two more bills were brought to tackle MMJ taxes: Assembly Bill 1548, which proposed a cultivation tax, and Senate Bill 297, which would implement an excise tax.

The author of the Senate measure later introduced Senate Bill 987 in February 2016 with a 15% excise tax.

The cultivation tax rates from AB 1548 and the 15% excise tax both were written into Proposition 64.

“When those bills were introduced, those were placeholder numbers,” recalled Hezekiah Allen, who was negotiating with state lawmakers at the time as the executive director of the California Growers Association (CGA). Allen now chairs the board of Emerald Grown, a co-op of small cannabis farmers in the Emerald Triangle.

Allen said that the author of the excise tax bill, Sen. Mike McGuire from Humboldt County, originally wanted a 20% excise tax, and by the time the bill was shelved in the summer of 2016 it was amended to a 10% excise tax.

At that time, it was too late to change the language of Prop 64, so taxes were set.

As Prop 64 developed, the rates themselves weren’t as contentious an issue as some other debates among insiders over what to include in the measure, recalled Tamar Todd, former legal director at the Drug Policy Alliance, who helped write the law.

And one of the goals was to get the rates to work so that state income from cannabis taxes would hit $1 billion a year, Todd said.

That $1 billion in tax revenue turned into part of the campaign’s message to voters, said Allen.

“Being able to promise California $1 billion a year was a big factor in how the policy came down,” Allen said.

Now, the tax rates are part of the blame game, especially because the state recently increased the markup rate for cannabis.

To lower the tax rates would take two-thirds support in both chambers of the state Legislature or a new ballot measure – both of which are hefty political lifts and uncertain shots at best.

Still, lawmakers are attempting again this year to lower MJ taxes, to ease the industry’s financial burden.

John Schroyer can be reached at [email protected]

17 comments on “How California’s legal marijuana market wound up in crisis mode after two years
  1. Leandro Victor Avila on

    The great welfare state of California wants everyone else to pay for it’s financial negligence. Why would I buy from a dispensary that sells marijuana with a 50% to 100% mark-up just to cover taxes so dispensary 200.00 a oz or Street for 80.00 a oz do the math.

    People who need it medically like my self can’t afford to buy from a dispensary. That’s why dispensaries are shutting down. One of the largest Med men it’s like a Apple store for pot. And you will pay double what it’s actual value. But what they don’t tell you is that most counties regulate there own city laws.

    So now as a medical patient I can’t grow my own out side no longer. Then I’m limited to grow only 2 plants indoors. I grow for my pain over 16 surgeries. I can’t afford high price money for a weed and yes all marijuana is just a weed. So if in CA you will never get ahead if your a dispensary.

    Yet you want the consumer safe but out price the help for veterans, disabled, elderly I would buy legally but can’t afford it. It’s legal it’s on my medical and prescribed by a hospital yet I get no insurance compensation on 2000. To 3000.00 dollars a year it cost me to buy from a dispensary when I can get it off the streets for half of that.

    So there is the truth it’s not about making people better it’s about draining the pockets of the consumer and grower. Filling the great state of Californias deep pockets.

    Reply
    • Jeremy on

      Something is off where you are going as being a medical patient you should get the sales and use tax exempt. Also it depends on which legal dispensary and in which city you are going. The dispensary my wife works at only taxes at 25% They also give veterans, and Senior Citizens a flat 20% off, so then for those two they are roughly only being taxed at 5%.

      I know the industry would be in a very different place if it was federally legal as certain states that have a surplus of supply, and can’t export it to other states would be able to after federal legalization, and thus would cause the price of an OZ to drop dramatically as per typical supply and demand. Then once that happens even if you tax at 50% for an OZ that would be say $50 now would still only be 75. Yes CA didn’t do it perfectly, but that’s why we need to keep fighting for it fully legalized everywhere.

      Reply
  2. Rod Gass on

    You’re correct on the 2 main points, John.

    Local Punishment combined with excess taxation. If a consumer is to be “legal” then it must submit to the sad reality. If opposed to the regulations it’s a crime locally or tax evasion of the California tax scheme.

    “Legalization” via $64 is in fact another prohibition.

    Do We really need this sort of corruption in the California Bureau of Cannabis Control?

    It’s such a simple scheme to comprehend … Redefine prohibition by selling the tax scheme. Everyone except those who are being penalized or prohibited will go for the idea. Hence the vote totals.

    That promised annual one billion in new taxes is actually how much? It’s pitiful.

    $64 should need be repealed.

    Reply
  3. frankie perez on

    Anyone with half a brain could see from the beginning that Prop64 was just a huge scam pitched to the idiots of the caliph as ‘legalization’ when it was just really ‘re-regulation’ allowing the democrip gangsters that control everything in the state to grab the cash since with the medical program no taxes were allowed. But of course the democrips liked the idea of outrageously high taxes since their sponsors in the cartels could keep their market share in the illicit market. So the democrip politicians and their buddies in the cartels are both happy and that is all that matters in the criminal state. Grow your own and to hell with the democrip gangsters and their ripoff weed.

    Reply
  4. John on

    Why does the government always screw up everything, they tax the hell out of everything they don’t even work and get more money (salary) than the public. They are mad because as usual they aren’t getting all of the money.

    Reply
  5. splat on

    The saddest part of legalization is that it was done as a means to collect more taxes, not because it was the right thing to do – to finally admit the war on drugs was simply a war on people. Then’s no end to the greed amongst politicians. And no right to outweigh the wrongs.

    Reply
  6. Ron on

    I guess the legal pot retailers in the state need a few good middle men to peddle their crop in a piecemeal fashion in order to turn a reasonable profit. Secret back door sales are the order of the day.

    Reply
  7. Joseph Thomas on

    I have fought for legalization for over 50 years; legalization, not commercialization. Bloody banks have to get a piece of every human want and need. $35 for a gram of weed? Is you crazy? If this is the best the business and political class can do? A real marijuana industry would allow me to buy it by the ounce or pound at my local farmers market for maybe $2 a gram, because that’s all it’s really worth. Capitalism is killing the market…

    Reply
    • Sarah H. on

      Uh hello? A free market would be capitalism, what we have is overregulation, the opposite of capitalism, more like socialism. That’s California for you!

      Reply
  8. Whiskers in Heaven on

    Once again California took something simple & screwed it up. No one who grew for pain or pleasure wanted Prop64 to pass. I cannot imagine how frustrating it must be to work with this states legislative bodies. Just look at Calavaras County, man did that county put the jackboots to all the folks who were welcomed & encouraged to come grow there prior to the passage of Prop64. None of us, grower, seller, or user wants to buy the street stuff. Most of us know there’s no oversite especially to pesticide use & most of us who care about our planet positively HATE what illegal growers are doing to the water & land. I applaud those of you trying to make this work & pray you can. It is a phenomenal plant with so many uses beside medicinal & recreational. It is a great agricultural crop & could really be beneficial on so very very many levels. Hope you folks in the trenches can get it done. Blessings

    Reply
  9. Joe Vickers on

    I’m not a resident of California, but your State seems to effective other States criteria. My voice means probably nothing to your State, because I’m not a citizen of California.
    Being on the east coast our State is looking at all negative things not the positives things.

    Taxes to meet state standards would determine how sales would be for all States. If you had competitive growers that would seem to compete for business would seem to increase a black market sales due to cost. Lowering taxes could keep prices down and tax revenues up.
    It is a well known lower prices greater the sales.

    Just as a struggling State with these problems are just slowing down our State decision on the eastern side.
    Our State has dropped revenue being that the Coal mining industry has been struggling.

    Thanks,

    Reply
  10. Jake on

    well it is California they will screw up anything they get involved in.
    the state expects to get rich off the taxpayers and they never learn.
    ive been here my whole life and im getting ready to bail out i dont seen things ever getting better our politicians are trying to chase all us gainfully employed people out and its working really well.

    Reply
  11. A Storms on

    One more example of greed and
    Politicians incompetent management
    skills messing up a good thing.
    It is working in Colorado, take what works , and improve on it!
    Y’all count your blessings, you could be here in Texas with even dumber politicians that ignore 65% of the people’s wishes .
    This too shall change.

    Reply
  12. HeadStrong on

    Re-write the laws. Fore high taxes at every step of any production of a product is unsustainable. Taxing a plant also makes no sense. A person/entity cannot patent nature, nor should the bounty of the earth providing care for it’s humans be taxed to a human/business-enity.

    The laws around cannabis as is currently, simply doesn’t make logical sense.

    Reply
  13. Willy Dial on

    keep in mind that california exports 70% of the weed it grows… why would any grower that sells out of state want to get a legal license? what the state expected to happen didn’t because of this fact… at which time they increased the taxes to help meet their expectations… what is needed is federal legalization so california’s exporters can get legal licenses… rather than having to stay underground… no other state has this unique problem… except maybe hawaii… if we stopped exporting and everyone that grows was legal… what would we do with all that extra pot?

    get on the feds to end this prohibition… not california… we tried to do it right but something kept it from going our way…

    Reply
  14. RW Akile on

    Prohibition by any other name is still PROHIBITION. THE FACT THAT PEOPLE EAT THIS PLANT MAKES IT FOOD AND THE FACT THAT IT IS MEDICINE MEANS THAT NO TAXES ARE ALLOWABLE.

    Reply
  15. Michael Flynn on

    WellI was going to leave a comment but my sentiments were voiced very eloquently by those who visited before me. Pull your head out California. I am tired of being the butt of jokes for the rest of the nation. I mean, it is not required to fulfill the stereotype.

    Reply

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