Cannabis Market Crash Fallout – Cities and Towns Brace for Plunging Tax Revenue from Weed Sales

The anticipated decline in tax revenues from cannabis sales in cities like San Diego is causing concern among city officials, who are bracing for a substantial drop in their budget. With California’s regulated marijuana market facing numerous challenges, including illegal delivery services, San Diego predicts a significant revenue shortfall.

Precisely, officials forecast a 23% decrease in cannabis tax revenue for the current fiscal year, resulting in $19.8 million instead of the expected $25.7 million. The decline in sales is primarily due to the thriving black market, which is believed to comprise roughly 50% of the local cannabis industry.

According to Phil Rath, who serves as the executive director for the United Medical Marijuana Coalition, the legal marijuana industry is currently grappling with fierce competition from its illicit counterpart. As a trade group representing a multitude of marijuana dispensaries, Rath asserts that delivery services present an ongoing and persistent obstacle for the city. The San Diego Union Tribune echoes this sentiment, highlighting the difficulties faced by local authorities in enforcing regulations and curbing the influence of black market operators.

Moreover, the declining tax revenues in San Diego indicate a more significant issue pervading the state of California. After nearly seven years since its legalization, the legal cannabis market has faltered, resulting in significant setbacks for the industry.

As per a report by Politico in November, the tax revenues generated from state-sanctioned and regulated marijuana markets have taken a severe hit, plummeting by almost $100 million during the third quarter compared to the same period in the previous year. The licensed retailers operating within the state are trailing far behind the massive underground market, estimated to be worth an enormous sum of up to $8 billion. Despite the significant decline in tax revenues, it has been projected that the sales of medical and recreational marijuana in California will increase by 2021. However, the sales have been consistently declining, dropping from a high of over $1.5 billion in Q2 2020.

The data released by California tax and The Office of Fees Administration in July, August, and September showed that the state residents had bought licensed cannabis products amounting to $1.27 billion, leading to $128 million in sales tax revenue. Although this was still substantial, it marked a decrease of $18 million from the preceding quarter and a drop of $52 million from the record-high figure.

California’s black market deals a massive blow to its legal cannabis industry.

As per a separate report by Politico during the same month, California’s black market has dealt a significant blow to its legal cannabis industry, with the unregulated sales overshadowing the legal counterpart. Despite six years since the vote to legalize recreational marijuana, the state has been unable to bring illegal sales under control. The overwhelming demand for marijuana products has resulted in many legal businesses closing their stores.

The success of the legal cannabis industry in the most densely populated state in the country has been hindered by a combination of factors, including high taxes, local government opposition, and cut-throat competition from the underground market. Politico highlights that the exorbitant taxes on cannabis products have led to inflated prices, making them unaffordable for many consumers. Additionally, the reluctance of several local authorities to allow the opening of legal dispensaries has further hampered the industry’s growth.

To revive the faltering legal cannabis industry, lawmakers and officials in California have been exploring various measures.

Recently, Democratic legislators in the state put forth a bill enabling licensed cannabis consumption lounges to serve food and beverages, potentially providing a much-needed boost to small-scale cannabis businesses grappling with multiple challenges. According to Rep. Matt Haney, who is backing the proposed bill, the small cannabis businesses in California are facing significant struggles due to various issues, including excessive taxes, saturation in the market, and the thriving black market.

These factors have severely affected the legal operators that adhere to the authorities’ rules and regulations. The bill’s introduction could offer a viable solution to these problems, potentially helping to level the playing field for the licensed cannabis industry.

San Diego officials have not only downgraded their projections for the current fiscal year’s cannabis tax revenue, but they have also revised their long-term forecasts. The revenue generated from cannabis taxes is meant to fund dispensary enforcement and a novel cannabis equities program to assist people of color in establishing a foothold in the industry.

According to the Union Tribune, the officials acknowledged that the cannabis industry has been severely impacted by the war on drugs. The earlier long-term estimates for cannabis tax revenue, projected just over a year ago, stood at $31.5 million in fiscal 2025, $33.3 million in fiscal 2026, and $33.8 million in fiscal 2027. However, the revised estimates in November 2022 were much lower, with projected revenues of $26 million in fiscal 2025, $28.4 million in fiscal 2026, and $28.9 million in fiscal 2027. The officials expressed their need for more confidence in the revised forecasts.

Five states saw cannabis tax revenue decline in 2022

A new report from the Urban Institute & Brookings Institution reveals that in 2022, the five states with the longest history of legalizing and taxing marijuana sales experienced decreased tax revenue from the sale of cannabis products.

Colorado saw the most significant decline of 13.9 percent in tax revenue, resulting in a loss of $56.9 million in revenue. The other states that experienced declines were California, Nevada, Oregon, and Washington, with more modest declines ranging from 3.5 percent to 6.8 percent. The report analyzed cannabis tax policies across the country to arrive at its conclusions.

The authors of the study noted that tax revenue in Colorado and Washington had been rising steadily since 2015, and the cause of the decline last year was unclear. Still, they speculated it could be related to the pandemic. The COVID-19 pandemic and the federal government’s response to it affected all aspects of state and local finance in fiscal years 2021 and 2022. The authors suggest that the spike in cannabis tax revenue in 2021 may have been due to consumers having disposable income from stimulus checks, reduced spending options, and the desire to substitute marijuana purchases for more public activities like going to a bar or restaurant. The decline in cannabis tax revenue in 2022 could represent a return to more normal consumption patterns.

The report also highlighted that in some states, the sale price of marijuana decreased during the same period, impacting tax revenue and indicating a healthy market. This suggests that states with recently implemented cannabis taxes could experience comparable fluctuations in their yearly cannabis tax collections as the market progresses, the report added.

Conclusion

The decline in tax revenue from cannabis product sales in several states, as highlighted by the recent report from the Urban Institute & Brookings Institution, is cause for concern. However, lawmakers and officials across the country are exploring solutions to strengthen the legal cannabis market, including the introduction of bills to allow licensed consumption lounges to serve food and beverages and the implementation of programs aimed at supporting small cannabis businesses and promoting equity in the industry. As the market continues to evolve, it remains to be seen how these efforts will impact the industry in the coming years.

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