By Phillip Smith
California is on track to generate $1.9 billion in legal marijuana sales this year, according to new data from a financial analysis firm tracking the market. That’s a lot of weed, but it’s only half the amount the same firm previously estimated the state would rake in.
The estimates are from New Frontier Data, which crunches cannabis industry numbers, and are based on tax revenues from pot sales, which so far have fallen dramatically short of projections. According to New Frontier, the state collected $33.6 million in pot taxes between January 1 and March 31, which makes it extremely unlikely that tax revenues will meet original expectations of hitting $175 million in the first half of the year.
New Frontier had earlier estimated that the state would see $3.8 billion in marijuana sales this year, and this latest estimate slashes that number by a whopping 50%. The company also slashed its projections for the size of the legal industry by 2025. Instead of the $6.7 billion in sales it earlier estimated, it now says it thinks sales will only hit $4.7 billion, a hefty one-third reduction.
That’s bad news not only for state tax revenues but also for an industry that is supposed to be coming in out of the cold. What happened? New Frontier has an idea.
“It is quite clear that the new adult use regulations have made it more difficult than anticipated for the legal market to get established and for consumers to transition to from the illicit market. Given the number of local government bans on cannabis businesses, we are not seeing the same kind of conversion rates that we have seen in other legal markets,” said Giadha Aguirre De Carcer, New Frontier Data founder, and CEO.
State and local licensing fees for marijuana businesses can range from $5,000 to $120,000 per year, depending on the type and scope of the business. And complying with regulatory mandates, such as those around zoning, water usage, and lab testing, costs even more.
It’s not just onerous — and expensive — regulation for those who want state licenses to grow, distribute, and sell marijuana that’s the problem. There’s also a serious lack of buy-in by a good portion of the state’s cities and counties, and that means that a big hunk of the state has no access to local legal marijuana.
“If there’s (no governmental support) locally, then there’s no option for a state license, and that’s why most people are being shut out at this point in time,” California Cannabis Industry Association executive director Lindsay Robinson told the Marijuana Business Daily. “The process gave local authorities an option to kind of sit on their hands, and that’s the biggest barrier that we’re seeing.”
According to CCIA spokeswoman Amy Jenkins, only about a third of the state’s 540 local governmental entities have approved commercial marijuana activity. Lack of legal access is “forcing consumers to turn to the illicit market,” she told the Los Angeles Times this week.
Or return to it. Or stay in it, if they never left. Humboldt State University economics professor Erick Eschker pegged the size of the state’s pot market — legal and illegal — at about $7.8 billion. Of that, about $2.3 billion came from the medical marijuana market, leaving about $5.5 billion for legal, grey market, and black market pot sales. If the legal market is only accounting for $1.9 billion in sales, that suggests that grey and black market sales are still about twice the size of legal sales. These consumers don’t get hit with stiff sales and excise taxes, and if they can still get it from the guy down the street, why pay those high, state-legal prices?
If California wants to eliminate the black market in marijuana, it’s got a whole lot of work to do. And no matter what steps the state takes to deal with its internal black market, there’s still the export black market to the non-legal states in the rest of the US. Ultimately, the only way to end the black market is to legalize it nationwide, but we’re not quite there yet. In the meantime, California’s transition to a legal marijuana regime is facing some unhappy realities.