California’s once-thriving cannabis industry is grappling with a steep downturn, as the legal pot market experiences significant contraction. The situation continues to deteriorate in 2024, following years of declining sales and widespread business failures. Unfazed by pot industry fortunes going up in flames, Union City’s Mayor Carol Dutra-Vernaci continues to pin the city’s hopes on pot taxes to bail the city out of debt.
The latest figures reflect the severity of the downturn. Legal cannabis sales have been declining for three consecutive years, with the number of licensed growers and brands plummeting by over 70% since the state legalized recreational marijuana. Many businesses have accumulated substantial debt, with pot companies collectively owing California more than $730 million in back taxes- funds the state will never recover, as most of these businesses have already folded.
Even in historic cannabis hubs like Humboldt County, few new pot farms are opening, and overall employment in the legal industry is shrinking. California’s cannabis market, once the largest in the world, is losing its edge.
This collapse is a far cry from the taxation optimism that surrounded the industry’s launch in 2016, when voters approved the legalization of recreational marijuana (Union City went “all-in” for pot in 2018, with Mayor Carol Dutra-Vernaci and then council member Emily Duncan voting in favor of the measure). Entrepreneurs flocked to California, eager to capitalize on what was seen as a lucrative opportunity in the world’s largest potential market for legal cannabis. However, the promise of loads of tax revenues and easy profits quickly faded as the market became oversaturated, and losses from employee theft and armed robberies and burglaries proved to be a greater hindrance than anticipated.
California’s legal cannabis industry has been hamstrung by a combination of high operating costs and high insurance costs which have made it difficult for businesses to operate profitably. In some cases, operational hurdles have even led to frequent corruption, as operators and even some officials across the state exploit the system for personal gain. As a result, many businesses have been forced to close, unable to sustain operations in such a challenging environment.
The economic strain has been felt across the entire supply chain. Cannabis farms were the first to suffer, as weak retail sales and falling wholesale prices made it impossible for them to turn a profit. Distributors, who act as intermediaries between producers and retailers, were next, as retailers struggling with cash flow stopped paying their bills. This has led to a cascade of bankruptcies, with even major players like Herbl, once California’s largest pot distributor, collapsing under the pressure.
The impact of the industry’s decline has extended to the government as well. Local and state tax revenues from cannabis sales have fallen way short of expectations, with many municipalities even unable to cover the costs of regulating the industry. An April report revealed that the state is owed more than $732 million in overdue cannabis taxes, but with 72% of the companies in arrears now out of business, this money is unlikely to be collected.
In addition, the high cost of enforcement, from city business licensing and code regulations to the enormous strain on police department resources, has many residents wondering if promises of tax revenue is worth the extreme risk. Police in particular have the burden of responding to armed robberies, which often result in security guards being shot (as happened at FLOR in the Union Landing Shopping Center), or risking their lives to protect cannabis companies (recently an Oakland police officer was killed by an armed suspect while the officer was responding to the second break-in of the night at an Oakland pot business).
While the legal market flounders, California’s illicit cannabis trade continues to thrive. High taxes and regulatory costs have driven many entrepreneurs to operate illegally, where they can avoid the regulatory burdens of the legal market. This has created a situation where illegal cannabis businesses outnumber legal ones, further undermining the state’s efforts to regulate the industry and collect tax revenue.
As California’s cannabis industry navigates these turbulent times, the path forward remains uncertain, even as neighboring states reverse their position on drug legalization. Oregon recently repealed its disastrous first-in-the-nation experiment with drug decriminalization. The poorly conceived measure came to an end in early September and possessing small amounts of hard drugs is once again a crime.
POT TAX REVENUE BURNS WHILE UNION CITY MAYOR FIDDLES.
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