Bay Areans cry deja vu as bureaucratic overreach ruins (more) local pot businesses
Image and article inspired by Kpop group TXT's 2024 song Deja Vu, about the powerful eternal bond two people in love share: "My future is you ... You're like deja vu."
Call it anemoia, call it an old promise—but by now, California residents are getting pretty used to gov't stifling industries with excessive regulations and licensing fees. As SFGate reports, since CA legalized marijuana in 2016, legit pot businesses have struggled to make profits amidst high tax rates—and cannabis growers are returning en masse to their place of promise: illegal selling.
California, with its population of more than 39 million people in 2016, was irresistible to cannabis entrepreneurs. The Golden State’s massive population meant that voters had suddenly doubled the scale of America’s market for legal weed by approving legalization of recreational cannabis. It would take two years for legal sales to launch, but capitalists wasted no time investing billions into California’s pot market.
Companies like the retail chain MedMen and distributor Herbl raised massive sums of money under the promise that they would be virtually printing cash. The bet was that folks who may not have been comfortable purchasing illegally, but were hesitant to get into the medical marijuana system, would spend money in recreational pot stores, opening up a whole new subset of customers. Thousands of farmers applied to grow cannabis to feed the state’s massive new cannabis market. …
But with the birth of a new legal industry also came a new maze of bureaucracy. California’s many layers of government also wanted a share of the newly flowing cash. The 2016 legalization initiative gave local governments nearly total control over regulations, which allowed politicians at both the city and county level to restrict how many licenses were allowed in their communities. They could also require hundreds of thousands of dollars in licensing fees, a trend that one industry blog called “extortionate” in 2019. In some cases, California’s local pot laws allowed politicians to engage in outright criminal corruption, as Politico reported in detail in 2020.
In short, lawmakers across the state saw the new industry as a “cash cow that needed to be milked,” according to Dennis Bozanich, who worked as a cannabis regulator in Santa Barbara (he was once deemed the “cannabis czar” by a local paper) during the first years of legalization. He now runs his own consulting practice for government affairs.
“I think everybody got greedy,” Bozanich told SFGATE, referring to both private companies that expanded too fast and government officials who created expensive regulations. …
California’s pot sales peaked in early 2021 and have since been coasting at a lethargic and slightly downward trajectory, with overall sales much lower than the estimates from pre-legalization had predicted. For the thousands of new pot business owners who invested heavily on the assumption their businesses would grow quickly — and keep growing for years — that spelled disaster. By the end of 2021, California was offering not a money-printing machine, but an overinvested market with nowhere near enough people buying pot.
Now, midway through 2024, thousands of pot companies have gone out of business, from the state’s biggest players like MedMen and Herbl to small family-run companies like Skibola’s Cosmic View. She decided to shut down her business this past April.
“This is a conscious choice for us to no longer participate in what is a broken regulatory system. It’s not like we ran out of money and had no choice; we decided that it was simply too painful to continue,” Skibola said. “I hear all the time, ‘Next year! Next year will be better!’ But next year is never better. … I personally think that it’s only going to get worse. …
While California’s legal market has struggled, a massive underground pot economy has thrived. Billions of dollars of cannabis is being grown, packaged and sold at illegal stores that often look like fully licensed dispensaries. Estimates vary on how large the illicit market is, but the head of enforcement for the state Department of Cannabis Control recently told NPR that the illicit market is “definitely larger” than the legal market.
California has created an almost perfect environment to push customers toward the illicit market. It’s extremely expensive to open a legal business, thanks to high taxes and expensive regulations, and local bans have meant that a majority of the state is still off-limits to legal businesses even if an entrepreneur did want to pay to set up shop. Meanwhile, penalties for running an illegal business were largely reduced from criminal penalties to financial fines in an attempt to reduce the racial harms of cannabis prohibition, which disproportionately impacted people of color.
If a legal business does get up and running, it has to contend with a significant tax burden. California has a 15% excise tax rate on pot, but the effective tax rate can climb to as high as 34% when factoring in state sales tax and local taxes. That’s made California’s legal pot extremely expensive compared with other West Coast states — and made the illicit products, which are sold tax free, a cheap alternative.
Read the whole thing here.
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