California’s marijuana market heads into a difficult 2022

With cannabis taxes poised to rise on Jan. 1 and a legitimate business landscape plagued by a thriving black market, California’s marijuana industry faces uncertainty.

Years ago, California voters approved the use of medical and recreational marijuana, with the expectation that legalization would lead to an elimination of a back market and the state would enjoy a dramatic revenue surge.

The Jan. 1 cannabis tax increase — like others before it — stems from a state law requiring the California Department of Tax and Fee Administration to recalculate the cultivation tax rates once a year because of inflation.

During 2020, an estimated $4.4 billion worth of recreational marijuana products were sold in California, and the figure is expected to rise to $5 billion in 2022.

In 2016, when cannabis was approved for recreational use in California, the tax was set to 15% on retail sales and a $9.25 per ounce of flower for cultivators.  In addition, the state also has a 7.25% state sales tax apart from the 15% on retail sales.

For cultivators, the levy on marijuana flower per dry-weight ounce will increase from $9.65 to $10.08, cannabis leaves will increase from $2.87 to $3, and fresh marijuana plant material will increase from $1.35 to $1.41.

During 2020, an estimated $4.4 billion worth of recreational marijuana products were sold in California, and the figure is expected to rise to $5 billion in 2022, according to Cannabis Business Plan, an industry publication. Through January 2021, there were about 10,000 licensed marijuana sellers in California.

But the figures can be deceptive.

The higher California taxes may translate into a further swelling of the black market, in which sellers offer their product for far less than the licensed stores, and some consumers are happy to pay less — 50 percent less, in some cases.

In addition, there are relatively few legal cannabis retailers in California — about two per 100,000 population — giving growers scant regulated outlets for their product. By one estimate, in neighboring Oregon the ratio is about 18 per 100,000, similar to Washington and Colorado.

“The cultivation market is absolutely collapsing,” said Amy O’Gorman Jenkins of the California Cannabis Industry Association.

The size of California’s black market for cannabis was $8.7 billion in 2019, far larger than the legitimate market, according to researcher Jan Conway in Statista. The legal market, however, is projected to overtake the black market in three years, the Statista report noted, although many are skeptical.

“More California cultivators are going out of business,” Jenkins noted, “because they can’t compete with the black market.”

The CAMP program destroyed about 1.2 million plants discovered and seized about 180,000 pounds of processed marijuana.

For regulated cannabis producers, there are hefty investments to get started, restrictions on who can be licensed, the annual costs of permits for water discharge, an array of paperwork and application fees, and more.

Prices for the finished product vary widely in California, depending largely on how its grown — indoor, outdoor, greenhouse with light deprivation, etc.  Indoor costs about $1,800 to $2,400 per pound, and about $2,000 on average, according to an estimate by  Beth Fisher, a veteran grower, in Quora.

Outdoor marijuana averages about $1,200 per pound, and the cost of greenhouse cannabis typically is somewhere between the prices of indoor and outdoor. But those prices are far from stable and are dropping, according to one report.

Why is the black market still thriving in a state where cannabis is recreationally and medically legal?

Meanwhile, the state has continued its efforts to eradicate illicit crops.

Earlier this year, the state’s Campaign Against Marijuana Planting, or CAMP, destroyed about 1.2 million plants discovered at unlicensed grows and seized about 180,000 pounds of processed marijuana.

Despite CAMP’s actions, the black market still thriving in a state where cannabis is recreationally and medically legal.

“Those unlicensed shops don’t have to pay for state and local permits and can sell marijuana much cheaper because they don’t charge customers marijuana taxes…,” CBS News’ Sharyn Alfonsi reported last year on 60 Minutes. “So it’s cheaper and easier to buy pot on the black market, which is three times larger than the legal one.”

In 1907, California passed the Poison and Pharmacy Act. This law banned the sale of substances like cocaine, morphine, and opium without a prescription. Several years later, California included marijuana on this list, being one of the first states to prohibit cannabis.

From having to compete with lower prices on the black market to high cost of maintaining the legal standards, some in the industry have had enough.

But by 1996, voters approved legalize weed for medical use with Proposition 215, with 55 percent of the 9.7 million voters saying yes. This made California the first state in the modern era to allow medical patients legal access to cannabis. In 2005, Oakland became the first city to regulate — and tax– cannabis for adult use.

Not surprisingly, many cannabis entrepreneurs have not been happy with the latest tax hike.

From having to compete with lower prices on the black market to the high cost of maintaining the legal standards, some in the industry have had enough.

Michael Steinmetz, the co-founder of the brand known as Flow Kana Cannabis, is threatening to withhold his taxes unless legislators adjust the state’s regulations.

“Today, Flow Kana has around 350 unique retail partners in a shrinking market of roughly 800, only 150 of whom we service regularly. Every other retailer is in default or on a payment plan — not because these are bad actors, but because it’s almost impossible for any of us to operate profitably under California’s broken regulatory regime,” Steinmetz wrote in  recent commentary.

Many dispensaries are selling flower by the “eighth” (⅛ of an ounce), with prices ranging from $30 for 19% THC flower all the way to $75 for 25%.

On the black market, the average price is re$20-$25 for the same quantity.

Brands like Raw Garden have approached the issue by not selling flower at all, but focusing instead on extracts. Being a cannabis extract brand has proven successful for the Santa Barbara company, given its reported position as California’s leading brand overall and best-selling cannabis extract brand.

But the bottom line is that uncertainties remain in California’s huge cannabis market.

“So it’s not like California is fully raging, fully legal,” Steinmetz said in a 60 Minutes interview. “Really, we’re building to, you know, a fully regulated state. But we’re not —  we’re certainly not there yet.”
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Editor’s Note: Uriel Espinoza-Pacheco is a Capitol Weekly intern from The Met Sacramento.