California’s cannabis industry was once heralded as the gold standard for legalized marijuana. Yet, despite its potential, the state’s legal cannabis market is teetering on the edge of collapse. Why? A mix of exorbitant taxes, overwhelming regulations, plummeting sales, and the allure of the illicit market is steadily dismantling the framework of what was meant to be a thriving regulated industry.
A Once-Promising Industry Faces Decline
When California legalized recreational cannabis in 2016, some expected the industry to thrive. The promise of a robust tax stream, regulated markets, and eradication of ‘illicit’ operations created a sense of optimism for those looking to get into the regulated market. Fast forward to today, and the stark reality is that legal cannabis businesses are struggling to survive, with some on the verge of shutting down.
One example recently featured in an article from SFGate, highlighting the struggling California legal cannabis market, is the Vapor Room in San Francisco, a dispensary that has weathered federal crackdowns and fought in courtrooms only to find itself drowning under $250,000 in tax debt. And this is not an isolated incident. According to data shared with SFGate by the Department of Tax and Fee Administration the state’s cannabis businesses owe a staggering $1.3 billion in unpaid taxes and penalties.
Why Is California’s Cannabis Industry Struggling?
There are several factors you could point to that have contributed to the industry’s downward spiral:
Exorbitant Taxes Are Crushing Businesses
California’s cannabis tax structure creates a massive burden on legal operators. Cannabis companies face multiple layers of taxation, including excise taxes, local taxes, and sales taxes. Together, these can push total taxes to over 40% in some jurisdictions.
Starting in July, the state plans to increase the cannabis excise tax from 15% to 19%, which could push total taxes above 50% in areas like Los Angeles. This steep cost drives consumers toward the ‘illicit’ market, where they can purchase cannabis far cheaper without the additional costs baked into legal products.
Unfortunately, the tax burden doesn’t just eliminate profits—it compounds over time due to California’s punitive laws. While most industries face a 10% penalty for late tax payments, cannabis businesses face a draconian 50% penalty. This makes it nearly impossible for struggling businesses to catch up on debt, as illustrated by Vapor Room’s founder Martin Olive, who stated to SFGate, “You’re basically charged more than what you owe.”
Unrealistic Regulations and High Operating Costs
The cannabis industry in California is one of the most heavily regulated markets in the U.S. Compliance costs—covering security requirements, licensing fees, testing mandates, and packaging standards—are astronomically high. Small to midsize businesses, which make up the majority of the industry, are particularly vulnerable as they lack the resources to meet these demands while also absorbing losses from taxes and declining sales.
To make matters worse, these costs coincide with a consistent drop in wholesale cannabis prices, which means businesses are operating within increasingly tighter margins.
The ‘Illicit’ Market Is Thriving
High taxes and overregulation have unintentionally fueled the growth of California’s illegal cannabis market. Customers can easily find cheaper cannabis through unlicensed sellers, especially younger consumers who prioritize low prices.
The illegal market undermines the legal industry by creating an uneven playing field. Licensed businesses not only struggle to compete on cost but also risk losing their customer base entirely. Jerred Kiloh, owner of The Higher Path Dispensary in Los Angeles, summed it up by saying, “You have a very nimble demographic in the under-35 group that is just one Instagram post away from leaving the legal industry.”
In October, reports emerged highlighting the significant amount of money in the ‘illicit’ California cannabis industry. Between two agencies, over $500 million worth of cannabis was confiscated.
Additionally, a report yesterday from California’s Unified Cannabis Enforcement Taskforce (UCETF) revealed that they seized a combined total of more than $19 million worth of illegally grown cannabis and illegally manufactured cannabis products during concurrent operations in Oakland and Hayward.
Decreasing Sales Compound the Problem
Legal cannabis sales have been on a steady decline for the past three years. The reasons range from broader economic challenges, such as inflation, and, of course, some companies still recovering from the COVID-19 pandemic.
Business owners, like Olive, also cite local challenges, such as tax differences between localities and diminished support within their communities, as contributing factors in declining revenue.
Upcoming Tax Hike
The planned tax hike in July—raising state cannabis excise taxes by 25%—is set to be the ‘nail in the coffin’ for many businesses. Industry experts warn that the tax increase could accelerate closures across the state.
The challenges facing California’s cannabis industry extend far beyond individual businesses. The failure of this once-pioneering industry would undermine the promise of legalized cannabis while erasing years of progress in cannabis legalization.
Furthermore, the state government risks losing critical tax revenue. Ironically, the very tax increases meant to bolster state funding might deprive California of future revenue as more businesses fail or exit the market entirely.
For California’s cannabis industry to avoid collapse, significant reforms are essential. These include implementing more reasonable taxation, streamlining regulations, and providing financial relief for businesses weighed down by years of accumulated penalties.
Beyond government intervention, fostering stronger support for legal operations within local communities can help rebuild trust and attract customers back to licensed dispensaries.
The story of California’s cannabis industry serves as a cautionary tale for states and countries exploring cannabis legalization. The current crisis highlights the dangers of overburdening an emerging market with excessive taxes and regulations.
For policy-makers, consumers, and industry stakeholders, now is the time to advocate for meaningful change before it is too late.
