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.Up in Smoke: Is the legal-cannabis industry on the verge of collapsing?

When legalization proponents sold voters on Prop. 64 in 2016, one of their chief arguments in favor of the measure was that legal weed would yield a cash bonanza for state and local governments throughout California. And indeed, they seem to have been right.

But now, many of those very same people argue that those taxes need to be reduced or eliminated altogether. And indeed, they seem to be right about that, too.

Their shift might seem hypocritical. But, of course, it’s way more complicated than that. When Prop. 64 passed, pot was legal for all adults in only two other states, and had been for only a few years. Nobody could know precisely what would happen, though plenty of people were certain that they did know, or at least sounded like they did. Most people thought the legal market would overtake the illicit market. After all, if you can go into a shop and buy weed just like you buy a bottle of Snapple, why would anyone buy it illegally?

Well, because the Snapple doesn’t cost $7 a bottle, is why. Prices of weed have plummeted lately, but that doesn’t mean the differential between legal and illicit is any less stark. The market for illicit pot in California is still much larger than the legal market—approaching three times the size, by some estimates. That’s the chief reason people are calling for lower taxes. Another big reason for the illicit market’s dominance: the decision—also embedded in Prop. 64—to allow local governments to decide whether or not to grant cannabis licenses. Huge swaths of California are pot deserts, with no dispensaries within reasonable driving distance.

Although the California cannabis industry was saved from almost certain devastation last year by, of all things, the Covid pandemic—the industry was declared “essential” and demand spiked—that doesn’t mean it’s not still at risk. Profit margins are already often very thin. Taxes make them thinner still, and tend to soften demand. On top of that, cannabis operators in the Bay Area, and Oakland in particular, are beset by constant break-ins and robberies, like the series of coordinated attacks the week before Thanksgiving, in which 25 cannabis businesses were targeted, resulting in about $5 million in losses.

Crime is the chief reason Oakland pot merchants have called for the elimination, or at least suspension, of the city’s pot tax. But even in areas that don’t see that level of crime, local levies—coming as they do on top of the state’s set of weed taxes—are a major burden. There have been calls to reduce or eliminate them, on both the state and local levels, for a couple of years, with only limited success—as when Oakland lowered its taxes a couple of years ago. But the tide might finally be turning.

Last month, San Francisco decided to delay for another year the implementation of its local tax. “Sadly, the illegal market is flourishing by undercutting the prices of legal businesses,” said San Francisco Supervisor Rafael Mandelman. That, he said, “is bad for our economy, as illegal businesses pay no taxes while subjecting workers to dangerous conditions and consumers to dangerous products. Now is not the time to impose a new tax on small businesses that are just getting established and trying to compete with illicit operators.”

Meanwhile, Democratic state Sen. Mike McGuire, of Ukiah, has introduced legislation to eliminate the state’s cultivation tax, which small growers say threatens to put them out of business.

Lindsay Robinson, executive director of the California Cannabis Industry Association, favors the proposal, as well as proposals to lower the state’s 15% excise tax on weed sales. “The industry is at its breaking point of a potential collapse,” she told the North Bay Business Journal.

“Collapse” doesn’t mean dispensaries will go away. It means that the industry would likely be taken over by large enterprises and consolidated, pushing smaller players out of the business and giving power over the market not only to big weed companies, but perhaps also to giant corporations—Amazon? Coca-Cola? Philip Morris?—that could easily absorb the costs and, thanks to scale, reap huge profits.


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