Legislative Inaction Leaves Pot Industry Struggling

Without a budget to process state cannabis licenses or a reform to extend them, hundreds of existing license-holders could end up out of business.

There are two main approaches to solving the crisis in California’s legal-cannabis industry: First, lowering taxes and eliminating or changing restrictive laws in order to allow legal sales to thrive and dissuade black-marketeers. And second, taking steps to crimp the illicit market.

Most people prefer the first approach, which would obviate the need to worry so much about the second, which often involves police raids on illicit pot operations. Most Californians assumed that pot busts would end with legalization. The opposite has been the case. Raids on grow operations and illicit sellers continue apace as pot consumers continue to flock to their favorite dealers, who offer products that are just as good as what they can get in licensed shops, but at a fraction of the cost. The busts aren’t making much of a dent in the illicit market, and the legal pot industry is paying the steepest cost.

The California legislature has done essentially nothing in the current session to solve the problem, beyond a couple of stopgap measures. At the same time, the challenge is far from simple, whatever industry advocates might say. Essentially, it comes down to a conundrum: the state needs to regulate a brand new, highly problematic industry. That costs money, which means taxing the industry, which in turn means higher prices and fewer customers, and a bigger black market. And the cycle continues.

When it comes to taxes, the trick is to find the “sweet spot” — a rate that would allow the industry to thrive while also paying the costs of regulation, including cracking down on the black market, according to Assemblymember Rob Bonta, D-Alameda. His latest, modest attempt to do so, however, was shot down in May, when the Appropriations Committee shelved a proposal to cut sales taxes from 15 percent down to 11 percent, and eliminate the cultivation tax altogether. One staffer who works for a Democratic lawmaker who favored the cut (not Bonta), and who asked not to be named, blamed the situation partly on his own party’s hesitancy to cut taxes on “big business,” even if it’s the pot business, and even if it would benefit consumers. “Some of them just think cutting taxes not a good look politically,” the staffer said.

But many observers agree that the main problem is budgetary. Even with current high tax rates, the state is struggling to perform the often-onerous tasks needed for sufficient regulation. Just last week, a proposal was added to the state budget bill that would extend by five years the time that growers and sellers can operate under provisional licenses. In its opening paragraph on the measure, a straight-ahead news story in the Los Angeles Times last Friday called the proposal “another sign that California’s legal cannabis market is in deep trouble.” The problem is that the state isn’t able to process applications for permanent licenses. Hundreds of businesses across the state worry that if they don’t get extensions, they’ll have to halt operations.

Environmental groups like the Sierra Club oppose the bill because growers with provisional licenses aren’t required to comply with the stricter environmental rules that come with permanent, annual licenses — like those preventing the pollution of waterways. The cannabis industry says the state doesn’t have enough staff to handle the applications. The state says many in the industry are failing to properly comply with application requirements, which are complex and involve lots of paperwork.

Wherever the fault lies, the fact is that only about 200 growers have obtained full licenses, and more than 1,500 are still working with provisional licenses, according to the Bureau of Cannabis Control. The numbers are even starker for retailers: just 39 have full licenses, and 2,751 are operating with provisional licenses or temporary permits.

“This proposal won’t solve the problems, but it might get us the time we need to make some improvements,” said Hezekiah Allen, chairman of Emerald Grove, a cooperative of 130 growers headquartered in Humboldt County. Allen allows that the situation “makes it clear that the implementation of regulated cannabis in California is off track,” but the proposal at least “shows an awareness of that reality and is the first proposal to outline a realistic timeline” for getting operators fully licensed. He added that he hopes “the additional time is spent developing, passing and implementing a comprehensive, systematic reform of our state’s failing cannabis laws.”

On another front of failure, the legislature last week couldn’t bring itself to pass a relatively simple measure, Senate Bill 658, which would have established a program requiring legal cannabis sellers to display a state-issued emblem indicating that they were legit, and not part of the black market. The bill would also have patched local regulators into the state’s track-and-trace program, making enforcement easier. The measure wouldn’t have come anywhere close to solving the black-market problem, but proponents, like the California Cannabis Industry Association, said it would be marginally helpful. Nevertheless, the legislature couldn’t even do that much. Sen. Steven Bradford (D-Gardenia), who sponsored the measure, has said he’ll re-introduce it again next year. 

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