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California Legal Marijuana Market Is Poised for Growth, but the Illegal Market Stands Strong

California's Marijuana Market

While California’s legal marijuana market is on track to hit $3.1 billion by the end of the year, illegal-market marijuana continues to thrive by offering consumers a better deal.

California’s legal marijuana market is the biggest in the world, but it continues to be eclipsed by the state’s booming illegal market. A new report from Arcview Market Research and BDS Analytics suggests that California consumers spend about $3 in the state’s illegal marijuana market for every $1 in the legal one.

Still, the future looks bright for legal cannabis in California. After a lower than anticipated opening year, the new report predicts continued growth in the coming years, and $3.1 billion in legal cannabis sales in 2019 alone.

The report, “California: Lessons From the World’s Largest Cannabis Market” was released in mid-August. In it, the authors examine the state’s thriving cannabis market and how it got off its feet.

California’s Legal Marijuana Market Recovers From a Rocky Start

California voters legalized recreational cannabis sales in 2018 by approving Proposition 64. As the world’s largest marijuana market, all eyes were on the Golden State as they ventured into an open market for recreational cannabis.

What unfolded was a struggle from the start, as the state and local governments fumbled through the new regulations of a legal cannabis industry. The confusing new rules in combination with the addition of a new heavy tax load led to exhausted funds from cannabis farmers and business proprietors eager to join the legal market.

When recreational marijuana was legalized in California, it came with two new taxes: A cultivation tax ($9.75 per ounce) mandated by state law on all harvested cannabis that enters the commercial market, and an excise tax (15%) on marijuana and marijuana products. In addition, retail sales of marijuana products are subject to state (base rate of 8.75%) and local sales tax.

According to reports, California’s then Governor, Jerry Brown, estimated that legal cannabis would bring the state $643 million from cannabis taxes in 2018. When the numbers came in, it was clear the forecast fell short of projections, with the total tax revenue of a little more than $345 million. Of the total tax figure, $182 million came from cannabis-specific excise taxes and $36 million was brought in from cultivation taxes.

However rocky the transition, the tax revenue generated from recreational cannabis sales was tremendous for the state. Tax revenue from one year of commercial sales ended up being more than three times higher than the state had collected in the 23 years of annual medical marijuana taxes.

To compare, in Colorado’s first year of broad legal cannabis sales, the state’s total tax revenue was more than $67 million. The state finally reached $1 billion in 2019, after five years in the legal market.

And it looks as if California’s market will continue to climb. The new report predicts a 23 percent increase in sales by year’s end, followed by consistent continual growth.

“Consumer spending is forecast to reach $7.2 billion in 2024, a 19% compound annual growth rate (CAGR) over the next five years,” the report’s authors wrote.

California illegal marijuana market

Why California’s Illegal Marijuana Market Stays Strong

Despite the steady growth of its legal marijuana industry, California’s illegal marijuana market continues to dominate.

Legal marijuana products simply cost more because of the market’s hefty tax load, prompting a large portion of consumers to find their marijuana elsewhere.

“California’s illicit market is predicted to make up 53% of all sales in 2024; compared with the majority of other states with more supportive regulatory regimes whose illicit markets are expected to shrink to 30% or less of total sales in that time frame,” the authors of the Arcview Market Research and BDS Analytics report wrote.

Another reason for the flourishing illegal market in California is an overall lack of access to licensed distributors compared to other states.

“California currently has a relatively low number of retailers for its population, with only one licensed retailer for every 35,147 adults over the age of 21. Contrastingly, Oregon has one dispensary for every 5,567 adults over 21, while Colorado has 4,240 adults age 21 and over for each retailer,” the report’s authors added.

The age of Californian consumers may also be impacting legal sales. The average legal marijuana consumer in California is 44, yet current data shows younger generations consume cannabis at higher rates.

According to the Arcview report, 39 percent of Gen Zers and millennials and 41 percent of Gen Xers report consumption in the past six months, compared to just 20 percent of Baby Boomers (born between 1946 and 1964) and older generations. With the high costs of living in California and a younger generation of cannabis consumers looking for the best deals, lower prices of marijuana could be tempting.

As spending on legal marijuana products climbs, the illegal market is expected to finally begin to drop. By 2024, legal spending is expected to grow to $7.2 billion, with the illegal market falling to $6.4 billion. That number is still a big slice of the cannabis industry, especially when compared to other states that have legalized marijuana.

Efforts to Level the Cannabis Market Playing Field

In response to cannabis industry leaders calling for reduced taxes to help gain momentum, Assemblyman Rob Bonta (D-Alameda) authored a bill that would have reduced the state excise tax on marijuana sales from 15 percent to 11 percent for three years and suspended the cultivation tax.

The measure gained support from State Treasurer Fiona Ma and the California Cannabis Industry Association, “as a way to create a more level playing field for the legal market.”

Another bill brought to the state legislation aimed at placing more cannabis dispensaries in the state. As of May 2019, the state had only licensed 631 cannabis retailers. According to the Los Angeles Times, that is only 10 percent of what state officials originally anticipated.

The measure, authored by Assemblyman Phil Ting (D-San Francisco), focused on the fact that two-thirds of cities in California have outlawed cannabis dispensaries. Many of those cities have sued the state over home marijuana delivery. Both bills were shelved due to a lack of support by state legislators.

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