California Cannabis at Six Months: Lessons to Learn from Colorado?
In November 2012, Colorado voters decided to legalize recreational cannabis. Legislation came into effect in 2014 with the first recreational retail shops opening on January 1st. The rest of the country watched the “great experiment” with baited breath as legislatures, entrepreneurs, and analysts wondered: Just how much money would recreational cannabis generate?
Since then, eight other states have made recreational cannabis legal for adult use, signaling a sea change in the minds of American consumers and their legislatures. California is now six months into its journey with legalized recreational cannabis, and although California has had a booming medical industry since Prop 215 passed in 1996, the passage of Prop 64 in 2016 has promised unparalleled economic growth, with financial experts expecting an excise tax revenue of $630 million by the end of 2018’s fiscal year next July.
For those interested in breaking into this growing, burgeoning industry, it’s helpful to know what challenges the California market is currently facing and what the future looks like in light of those challenges. Then, we’ll take a look at the state that experienced these challenges first – Colorado – and what they did to overcome them.
Financial Challenges in California
During the first two months of legalized recreational cannabis in California, consumers purchased approximately $339 million worth of cannabis products from retailers. A considerable number, yes, but it was still 13% less than analysts had projected.
As of May 2018, the actual first quarter excise tax revenue from the legal cannabis industry totaled $34 million. The states’ administration originally estimated the 2017-2018 cannabis excise tax revenue would total $175 million (the fiscal year that ends July 2018), but it looks like California is going to fall short of that estimate.
The “slow growth” in California could be due to a couple of reasons:
- State and local governments are still issuing licenses for cannabis retailers. Observers have described the rollout of recreational cannabis in California as clunky at best, wrought with confusion, delays, and a bottleneck at the municipal level (more on that below). But as more cannabis producers and retailers become licensed, experts predict sales and tax revenues will continue to grow – a trend which was also seen in Colorado.
- Much of California’s cannabis industry is still operating underground. Cultivation, processing, and selling of blackmarket cannabis has been a strong industry in the state for decades, and experts believe that 85-90 percent of the industry that existed last year is still not licensed.
What could be preventing black marketers from getting licensed?
One issue could be the high taxes levied at the local level. California’s 15% excise tax (in addition to its 8-10% sales tax) on recreational cannabis was clearly spelled out in the law, but the taxes put forth by local municipalities are more fluid, and can add an additional 5 -15% on top of the other taxes (Los Angeles’ is 10%, Oakland’s is 9.25%, San Francisco does not charge a local tax). These extra costs often end up getting passed onto the consumer, and while some are willing to pay, those who are not will typically turn to the black market.
That being said, it seems the biggest problem with California is the failure of local governments to issue licenses at all. According to Chris Beals, President of Weedmaps, not only are some local governments “slow to license,” more than two-thirds of cities in California ban any kind of cannabis business to operate within their borders – that’s approximately 338 cities out of 482 where recreational cannabis isn’t allowed.
When a large number of local governments ban recreational cannabis, it obviously prevents access to legal cannabis for a large swath of the community, driving consumers – and producers – to the black market. And what a black (and gray) market it is! In February of this year, over 6000 dispensaries and delivery services in California were listed on Weedmaps (a long-time resource for finding and rating dispensaries and cannabis products), but the state had only licensed 580.
With all these challenges facing California, budget makers and entrepreneurs have been worried about the state’s “slow start.” But they shouldn’t be – experts and analysts (including Greg Shoenfeld, Vice President of BDS Analytics of Boulder, Colorado) hasten to add that we often plan for best case scenarios, but implementation moves slower than that.
One only has to look to Colorado to understand this point. In 2014, Colorado also experienced a recreational cannabis rollout that wasn’t so smooth, but four years later, business has stabilized in an ultimately successful transition. California can benefit by observing the trials, tribulations, and solutions that Colorado experienced, some of which we’ll look at now.
Lessons from Colorado
During the first few months of legalized recreational cannabis, the state of Colorado received $11 million in tax revenue. This number fell below analysts’ expected projections which, as we noted above, was a trend also witnessed in California. Every year since then, as the market has stabilized, Colorado’s revenues have continually increased and eventually exceeded expectations.
By the time 2016 came to a close in Colorado, their cannabis sales had reached $1.3 billion in revenue, a 42% increase from 2015 ($996 million) and a 30% increase from their flagship year of 2014. And with all the generated income, Colorado has collected more that $150 million in taxes, with $50 million of that going directly to the funding of school construction projects.
Colorado Cities that Opt Out
Much like California’s Prop 64, Colorado’s Amendment 64 also gave local municipalities the option to ban (or opt out of) recreational cannabis, and some did. Vail – the famous ski resort town in Colorado – was one city that opted out. Vail’s Mayor, Dave Chapin, noted that they made the difficult decision in order to protect Vail’s brand as a worldwide ski vacation. Colorado Springs also opted out, citing the military’s presence in the town as a concern.
Mike Elliot, Executive Director of the Marijuana Industry Group, notes that the strategy works well for some symbiotic small-and-large tourist communities in Colorado (like Vail and Garden City or Colorado Springs and Manitou) but he also believes that the communities who ban cannabis businesses solely on moral grounds, or because they’re not ready to accept the wishes of voters have a “head-in-the-sand mentality” and he believes these communities end up losing more than they bargained for.
By opting out, these cities and counties allow the black market to thrive while also forfeiting sales tax revenues that could benefit the community. One only has to look to some of Colorado’s small communities that have flourished because they’ve opted in to recreational cannabis.
- Log Lane Village, a Colorado town with a population under 1,000, has two cannabis shops responsible for more than one quarter of the town’s sales tax revenues. Its 2015 budget of $264,00 increased to $400,000 in 2016.
- Manitou, a town 5 miles west of Colorado Springs, experienced a 62% increase (from $2.4 million to $3.8 million) in sales tax revenue from 2014 to 2015 thanks to recreational retail cannabis.
- Garden City, a small town near Vail, showed that 43% of their 2014 sales tax revenues came from retail cannabis.
These community benefits aren’t restricted to just sales tax revenue. A stimulated local economy can encourage other businesses to come to town, as seen in the growth of restaurants and weed-friendly accomodations in Colorado. In fact, after legalization in 2014, Business Insider found Colorado to have the fastest growing economy in the US while its unemployment rate fell to a six-year low.
Local communities in California who may be interested in reaping the economical benefits of recreational cannabis but fear their town being “taken over” or dominated by cannabis culture, should look to the solutions implemented by some Colorado cities. Manitou Springs, for example, who acknowledge their historic downtown is their city’s main draw for tourism. They wanted to protect this resource, so they made sure that two new cannabis retails stores were placed more than a mile from the downtown area.
The biggest lesson that California can learn from Colorado is that things take time. Attitudes on recreational cannabis are still changing, and many local municipalities are still figuring things out. Some may need to see a positive impact across the board before they decide to opt in, and others may just need to see the money that they’re missing out on.
Regardless, the implementation needs time to catch up with expectations. Patience is necessary. According to Troy Dayton, CEO of Arcview Group, “I suspect it’ll take about a year before things start to even out and you’ll start to have a really well-functioning market.”