California is paying a price for the shaky rollout of its legal marijuana market.
State budget documents released Thursday show the Newsom administration is sharply scaling back what it expects to collect in cannabis tax revenue through June 2020 — a $223-million cut from projections just four months ago.
The reduced income for the state treasury means that slower-than-expected pot sales are punching a hole in California’s budget.
The diminished optimism for retail pot sales comes as shops continue to be undercut by a thriving illicit market, in which consumers can avoid taxes that can approach 50% in some communities.
Meanwhile, state regulators have struggled to meet the demand for licensing, and many communities have either banned commercial sales or not set up rules for the legal market to operate.
Gov. Gavin Newsom said it was likely to take five to seven years for the legal market to reach its potential, a point he has made repeatedly.
But he also pointed a finger at local communities that have been resistant to legal sales and growing.
“It takes time to go from something old to something new,” Newsom said in Sacramento.
“We knew [some counties and cities] would be stubborn in providing access and providing retail locations and that would take even longer than some other states, and that’s exactly what’s happening,” he added.
Josh Drayton of the California Cannabis Industry Assn. credited Newsom with taking a clear-eyed view of the slow-emerging market and scaling back tax projections accordingly.
“I think this administration is being more realistic about the challenges faced by the regulated market,” he said.
A projected windfall of tax revenue was a major selling point for legal cannabis in California. Proposition 64, the law approved by voters in 2016 that opened the way for legalizing recreational marijuana for adults, outlined a long list of programs that would benefit from tax dollars collected from pot sales.
State taxes include a 15% levy on purchases of all cannabis and cannabis products, including medical pot. Local governments are free to add taxes on sales and growing, which has created a confusing patchwork of rates around the state.
The market is growing, just not as fast as once expected.
The state projects the 15% cannabis excise tax will pull in $288 million for the year that ends in June, and $359 million the following year. That’s a reduction of $67 million and $156 million, respectively, from the governor’s January budget forecast.
It now appears certain that the state will fall short of earlier projections, when it expected to collect $1 billion in new tax revenue annually from pot within a few years.
According to the state Finance Department, the excise tax projection was reduced after seeing no growth in the final quarter of 2018. Additionally, the number of places where one can buy legal pot remains limited.