Local bans on marijuana businesses in California are helping the illicit market to thrive and are depriving the state and municipalities of tax revenue that could help offset economic losses caused by the coronavirus pandemic, according to a new study.
The report analyzes the financial impact from the 75 percent of cities and counties that have implemented cannabis market bans despite the 2016 statewide vote to legalize the plant for adult use.
“Inconsistencies between different jurisdictions, particularly with tax rates, licensing procedures, and land use regulations” have created a situation in which “the illegal market continues to make up a large majority of the cannabis sales in California,” it concludes.
The analysis shows that while there’s strong demand and potential for revenue, California is far behind other legal states because of the widespread localized prohibitions.
“In benchmarking California’s legal cannabis sales performance against other states that have legalized recreational cannabis sales, the state generally does not fare well,” it says, noting that “California’s per capita taxable cannabis sales of $51.77 in 2019 is less than half the per capita sales in Washington, Oregon, and Colorado.”
The analysis—which was conducted by the financial consulting firm Applied Development Economics and commissioned by the California Hispanic Chambers of Commerce and Weedmaps (which, by way of full disclosure, is a longtime sponsor of Marijuana Moment)—used three jurisdictions with varying marijuana regulations to underscore the potential for local tax revenue that comes with allowing cannabis businesses. Those areas are Stockton, San Bruno, and unincorporated Sacramento County.
Stockton, which just last year developed a licensing system and established a five percent local tax on marijuana sales, could net anywhere from $824,500 to $3.9 million annually in revenue once it approves enough retailers meet demand.
San Bruno is “an untapped cannabis market with no existing cannabis retailers operating within the city limits,” the report notes. While the City Council approved a measure to put a proposed 10 percent sales tax on cannabis on the November ballot, it has yet to implement licensing regulations.
The analysis estimates that, if voters approve the Council-passed initiative and businesses are allowed to operate in the city, “local tax potential for the City of San Bruno ranges from about $235,300 to $1.1 million.”
The unincorporated areas of Sacramento County provide the most restrictive example in the report. While some local jurisdictions, including the city of Sacramento, allow cannabis businesses and impose local taxes, the county itself does not and doesn’t have any plans in the works to establish a licensing system.
Given the estimated range for demand, analysts said that if the county adopted Sacramento’s four percent tax rate, it stands to generate anywhere from $1.2 million to $5.8 million annually.
“Based on our independent and objective analysis, cannabis businesses show significant market potential for additional legal sales throughout California,” the report concludes. “This would result in substantial increases in tax receipts for state and local governments if the number of retail cannabis establishments expands to meet local demand in those communities that do not currently have legal retail cannabis sales.”
“Because of the state’s underperforming retail cannabis market, the range of potential market support has significant upside. The market demand already exists, with most of the demand currently met through illicit sales channels that generate no tax revenues. As local governments struggle with meeting their budget needs and providing essential services to their residents, legal cannabis sales represent a source of revenue that has remained untapped by most California jurisdictions.”
Julian Canete, CEO of California Hispanic Chambers of Commerce, said in a press release that local bans on marijuana businesses “have hampered opportunities for cannabis entrepreneurs for almost four years since California voters passed Prop 64.”
“In the wake of COVID-19, there’s never been a better time for local governments to embrace the potential for more tax revenue that fund critical services, and we hope this study encourages many to rethink their opposition,” he said.
Read the full study on California’s cannabis market below:
Photo courtesy of Philip Steffan.