California’s Illegal Marijuana Sales Flourishing

California’s Illegal Marijuana Sales Flourishing

In California Governor Gavin Newsom’s new budget is a nymber that says a lot about the Golden State’s legal marijuana market.

Now, California is expecting a lot less cash from cannabis taxes.

The Democrat’s proposed spending plan, released Thursday, projects the state will bank $355-M in marijuana excise taxes by the end of June. That is about 50% of what was once expected after broad legal sales kicked off last year.

Industry experts say the diminished tax income reflects reality: Most consumers are continuing to purchase pot in the illegal marketplace, where they avoid taxes that can near 50% in some communities.

Tax collections are expected to gradually increase over time, but predicting what that amount will be remains a guess.

Tax collections for “a newly created market are subject to significant uncertainty,” the budget said.

Josh Drayton of the California Cannabis Industry Association credited Governor Newsom with taking “a realistic look at the challenges” after a bumpy 1st year of broad legal sales.

The Governor recommended a sharp increase in spending for regulatory programs, although it’s an open question whether it will be enough to help steady the state cannabis economy. The budget recommends just over $200-M for marijuana-related activities in the fiscal year that starts on 1 July, a 50% boost from the current FY.

Initially “the state was too optimistic about how the implementation of legalization was going to work. This governor has paid attention to that,” Mr. Drayton said.

Mr. Drayton added that legal businesses need a break from hefty tax rates that are driving consumers to the illicit economy. Various proposals have been made to cut state marijuana taxes.

State taxes include a 15% levy on purchases of all cannabis and cannabis products, including medical marijuana. Local governments are free to add on taxes on sales and growing too, which has created a confusing patchwork of tax rates around the state.

The state’s top marijuana regulator has said the state intends to get more businesses licensed and operating in Y 2019, while cracking down on rogue operators who continue to proliferate across the state.

At year’s end, California’s effort to transform its longstanding illegal and medicinal marijuana markets into a unified, multibillion-dollar industry remained a work in progress. By some estimates, up to 80% of sales in the state remain under the table, taking profits from legal storefronts.

Mr. Drayton said more than 50% the municipalities in the state do not have laws governing the industry. That means pot businesses cannot locate there, since companies are required to have a local license before seeking one from the state.

The budget also includes an additional $2.9-M for the California Department of Tax and Fee Administration to help chase down tax cheats.

The courts budget includes nearly $14-M for re-sentencing of thousands of drug offenders whose offenses are no longer crimes since California legalized recreational marijuana.

Governor Newsom, an advocate for legalized marijuana, said it has long been expected the new market would take about 7 years to settle in, with twists and turns along the way.

The issues he intends to look at include the distribution pipeline and claims that local governments are gouging the industry.

The state will “move expeditiously at licensing more and more dispensaries, making sure we go after the bad actors,” he said.

Have a terrific weekend.

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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