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Early California Cannabis Tax Revenue Is Less Than Expected

May 9, 2018
The first three months of legal adult-use cannabis sales in California weren’t quite what the state was hoping for.

Earlier this year, state budget forecasters expected cannabis sales to produce $175 million in annual excise tax revenue. But sales in the first quarter of 2018 underperformed that number, coming in at $34 million. That extrapolates to $136 million, or about $39 million less than budget forecasters expect.

First-quarter sales produced $34 million in tax revenue, but the state was hoping for more.

The state levies two excise taxes on cannabis: a retail excise tax and a cultivation tax. (Local governments may levy additional taxes.) These taxes went into effect on January 1, 2018, and the first payments were due on April 30.

That early revenue figure was released yesterday by the Legislative Analyst’s Office, the California legislature’s nonpartisan economic policy advisor.

There are a couple caveats that come with that number. California adult-use sales began on January 1 with a limited supply of fully licensed stores. Many dispensaries continued as medical-only until their adult-use license was approved, so tax revenue has been constricted by a limited supply of open retail outlets. Second quarter revenue is expected to present a more realistic picture of the market, as most stores will be up and running through the entire quarter.

Also, the issue of “cannabis deserts” has emerged over the past three months, further complicating the picture. Proposition 64 allowed local municipalities to set their own rules with regard to cannabis companies, and many counties and cities have opted to impose outright bans on all cannabis businesses–at least temporarily.

Tuesday’s announcement was a short preview. The Legislative Analyst’s Office is expected to release its full report on first-quarter cannabis excise tax revenue on Friday.


California Bill Would Temporarily Cut State Cannabis Taxes

Meanwhile, in Other Legal States

Outside of California, a new report found that legalizing and taxing marijuana boosts revenue for state and local governments, but not by much.

The credit rating agency Moody’s Investor Service said in a study released Tuesday that legalizing recreational use of marijuana brings governments more money than it costs to regulate it.

In Colorado, a marijuana tax brings in the equivalent of about 2% of the state budget.

Despite high taxes on the legal sales of the drug, the revenue accounts for a small portion of government budgets. In Colorado, the first state to legalize recreational use, a marijuana tax brings in the equivalent of about 2% of the state budget.

In Washington state, gross revenue from marijuana legalization equaled 1.2% of general fund revenue in the 2015-17 state budget.

Most of the states that have legalized marijuana earmark the revenue for law enforcement, drug treatment and other specific programs, which doesn’t help the states’ financial flexibility.

Likewise, Moody’s described the revenue effect as minimal on local governments in states with legal cannabis.

Creating revenue for the state is one argument proponents use for legalization in New Jersey. Gov. Phil Murphy, who supports the effort, is planning on having an additional $60 million in taxes from legalized marijuana in the next fiscal year. That’s less than 1% of the state’s annual spending.


New Jersey Governor Looks to Legal States to Estimate Cannabis Revenue

Twenty-nine states now allow marijuana for either medicinal or recreational uses, and the business is growing quickly. Moody’s cited data from the market research firm Euromonitor International that projects it will grow from a $5.4 billion business in the U.S. in 2015 to $16 billion by 2020.

Meanwhile, illegal marijuana sales are estimated at $40 billion.


The Associated Press contributed to this report.

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Leafly Staff

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  • Open Minds

    Is this report factoring in money saved by not arresting, prosecuting and incarcerating cannabis users that previously would have been charged?

  • lovingc

    It is over taxed and over regulated the very things they were supposed to stop. Until they stop trying to make the cannabis taxes cover everything they will continue to have this problem.

  • kona ohana

    Medical marijuana should NOT be taxed. CANNABIS should be DECRIMINALIZED like tomatoes and the gov’t stay out of our lives.

    • Inspector Homes

      When were tomatoes illegal?

      • kona ohana

        The point it’s they never were and are not NOW , make pot legal like tomatoes….

      • kona ohana

        NEVER that’s the point

      • kona ohana

        Oh hahaha

  • Erik Peralta

    The main issue is the fact that the state law allows cities and counties to pretty much rewrite the law, prohibiting people from being able to grow outdoors means people aren’t going to be getting the permits and paying taxes. They will still grow outdoors, regardless of whether they are allowed to or not, but they won’t be paying taxes for it. It also has to do with the fact that they allow small cities and counties to ban dispensaries, which is the same as if they let them ban liquor stores. It prevents tax revenue from being earned when there is already a shortage of stores to buy weed at. I have a surplus of high quality weed that I guarantee would meet all standards to sell in a dispensary, but I’m not allowed to sell it because I cannot get a permit to do so, therefore it is wasted product that could be earning the state and my local community tax revenue, but is instead sitting around, earning jack shit. They need to change the law so that individual counties and cities CANNOT change the law that the state set forth. They CANNOT take away our right, given to us by the state, to grow six plants. These backwards communities (including my own) that are either stuck in the past mentality of anti-pot campaigns, or that are corrupted by big entities who want to have a monopoly on the market by squeezing out the little guys, are the direct reason why the state is not meeting tax revenue projections.

  • Rope-A-Dope

    Leafly, in your second paragraph, your Math is incorrect. Newspapers such as the San Francisco Chronicle and the Sacramento Bee point out that there would be $175 million in revenue in the first six months of the state’s new cannabis market. The State has a fiscal year end of June 30. The measuring time frame is January 1 through June 30. Extrapolating the first three months to extend the time frame out to six months translates to $68 million. This is a shortage of $107 million, not $39 million. That is a shortage of over 61%, not the 22% your article stated.