Is California’s Cannabis Industry in Trouble?

Graph showing business is down

Is California’s Cannabis Industry in Trouble?

Oct 28 2022, by Jessica McElfresh in Marijuana Business

As the first state to allow medical cannabis and among the earliest to approve recreational marijuana use in the U.S., many advocates hoped California would set a precedent for legal cannabis in America. However, more than five years after the state legislature ratified recreational use laws, the Golden State’s cannabis industry is in crisis.

Although cannabis taxes in California generated almost $300 million in revenue in Q1 of 2022 alone, growers and business owners don’t see the same profit — in fact, many are struggling to get by.

The State of California’s Cannabis Industry

Despite the positive public sentiment and optimism of cannabis advocates and supporters when marijuana was legalized, the reality of California’s cannabis industry is rife with red tape, pricing volatility, and more. These issues leave many small business owners and farmers wondering about the future of their careers.

Illegal Sales Market Still Booming

The increased availability of marijuana products may be exciting for users, but many buyers aren’t getting their product legally, nor are growers following all the rules. According to the Associated Press, some growers conduct business simultaneously in the legal and illicit markets. They find it easier to skirt reporting laws and make money from their product by double-dealing wherever possible.

One report from Politico estimates the illegal market’s value is nearly double that of legal sales. The continued demand for illicit sales is fueled by California’s lack of accessible licensed cannabis shops compared to other states, in addition to the fact that many cities haven’t embraced or outright banned cannabis sales.

San Diego, for example, only has around 25 licensed shops for a population of nearly 1.5 million. Many other cities limit market growth by placing caps on the number of licenses they give to businesses and growers. Though law enforcement agencies continually bust illegal grow operations throughout the state, the vitality of the illicit market is a symptom of a more significant problem in California’s cannabis industry — steep taxes and other regulatory expenses.

Rising Regulatory Costs Present Problems for Farmers & Business Owners

A report from The Economist found that running a profitable legal cannabis business in California is challenging due to the state’s high taxes, increased supply from more growers entering the market, and inflation driving up legal marijuana prices. California recently took steps to combat this burden on growers and sellers by eliminating the cultivation tax and creating new tax credits for some cannabis businesses. However, some critics say it’s not enough, mainly since counties can still impose their own cultivation tax.

In addition to unsustainable tax rates, those new to the world of cannabis business and cultivation may struggle to navigate the steps to establish a lawful operation due to complex licensing requirements, reporting regulations, and other security measures that must be completed.

Remedying Industry Issues

State legislators, including Governor Gavin Newsom, say cannabis tax reform is under consideration to help stabilize the market in 2022 and 2023. Many growers and business owners eagerly await changes to tax law to alleviate the strain on their bottom lines. Still, they remain hopeful for federal legislation to create a national cannabis market. In the meantime, local industry leaders and supporters continue pushing California cities to loosen their restrictions on selling legal cannabis products.

Call a San Diego Cannabis Lawyer Today

Whether you are a cannabis business owner, grower, or newcomer to the industry, San Diego cannabis attorney Jessica McElfresh can help you navigate the challenges you face and answer your questions. Attorney McElfresh knows California marijuana industry laws and provides experienced, knowledgeable, and practical counsel to help protect you from liability.

Reach out through our online contact form to learn more about how she works with cannabis businesses, or call 858-756-7107.