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California’s high taxes will burn its new legal pot market

California’s high taxes will burn its new legal pot market

The challenges of pot farming in the Golden State.

Legal Insurrection readers will recall that California voters went for Hillary Clinton and legalized pot in a big way during the November 2016 election.

As the state is poised to open up it pot market, it seems “high” isn’t in reference to the marijuana’s effects…but the state’s taxes!

State and local taxes on marijuana could surpass 45% in some parts of California, jeopardizing efforts to bring all growers and sellers into a state-licensed market in January, according to the global credit ratings firm Fitch Ratings.

“High tax rates raise prices in legal markets, reinforcing the price advantage of black markets,” the firm said in a report Monday. “California’s black markets for cannabis were well established long before its voters legalized cannabis in November 2016 and are expected to dominate post-legalization production.”

The report said that increased enforcement may blunt the illegal market, “but high taxes may complicate such efforts by diverting in-state sales to the black market.”

But I thought that legalizing pot was going to kill the illegal drug trade!

The rules related to the legal sale of pot are still not entirely clear, despite officials having a full year to craft the regulations.

…In general, California will treat cannabis like alcohol, allowing people 21 and older to legally possess up to an ounce and grow six marijuana plants at home.

Come January, the newly legalized recreational sales will be merged with the state’s two-decade-old medical marijuana market, which is also coming under much stronger regulation.

But big gaps loom in the system intended to move cannabis from the field to distribution centers, then to testing labs and eventually retail shops.

The state intends to issue only temporary licenses starting in January, and it has yet to release its plan to govern the estimated $7 billion marketplace, the nation’s largest legal pot economy.

If businesses aren’t licensed and operating in the legal market, governments aren’t collecting their slice of revenue from sales. The state alone estimates it could see as much as $1 billion roll in within several years.

Operators have complained about what they see as potential conflicts in various laws and rules, or seemingly contradictory plans.

Furthermore, the federal statutes making marijuana illegal make it a challenging business environment, especially in the wake of the wildfires. Banks and insurance companies do not do business with pot farmers, which force them into a cash-only financing and leave them struggling to recover from total product loss.

It is a recipe for economic disaster:

Because the marijuana culture of Northern California has survived in secrecy for the last 50 years, and mostly still does, no one can know the exact loss to the industry.

The threat of losing a year’s crop and cash reserves pushes many growers to take risks a grape farmer neighbor might not.

When the fires broke, farmers thrashed over four-wheel-drive roads with horse trailers full of hastily cut marijuana. Some defied evacuation orders to save the crops.

Others left, and lost everything.

The owners of Mystic Spring Farms expected its 900 marijuana plants to bring in more than $2 million this season.

The 12-acre farm in the mountains of eastern Sonoma County had its own spring for irrigation, buildings for indoor growing, greenhouses and open fields for outdoor farming. The farmers had investors, distributors, attorneys and business consultants.

But they had no crop insurance. When the Tubbs fire roared through the farm this month, they could only count it as a complete loss.

“Everything is gone,” said Kelvin Craver, 36, a onetime Hollywood producer who co-founded Mystic Springs Farms.

So, despite the fun, new legal status pot has in this state, the industry has many challenges to its profitability.


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It’s a weed that grows like a weed. People can grow it at home. Estimates of pricing and revenues are vastly overstated.

    redc1c4 in reply to wcvarones. | November 1, 2017 at 10:14 am

    you can make your own wine at home too, but you’re not likely to win any gold medals with it.

    anyone can grow ditch weed, but who wants that?

4th armored div | October 31, 2017 at 6:10 pm

LOL – Jerry’s kids not getting a pot in every chicken ?
in all seriousness, if i were a pothead, why would i pay Calif taxes when i can grow my own in a window box ?

who will pay the social costs for ‘drunk’ driving,
driving while smoking etc ?
can we sue the state for allowing this reefer madness ?

OleDirtyBarrister | October 31, 2017 at 6:11 pm

The state of affairs right now according to some people that purport to be in the know is that the growers and sellers want and need the appearance of legality in the western states in rebellion so that they can smuggle it out of state and sell it for the real money. The locals and the feds have not focused on interdicting weed leaving the rebellion states for other states, we have seen no reports of such busts, and it is flowing.

If the taxes raise prices so much to mess up the existing regimen, they may just tend more toward growing rogue and hope that the system is so overwhelmed that no one notices or that the local LEO’s are discouraged from worrying about small time weed horticulture.

    They had a large bust in Indy of a trucker carrying tens of thousands of dollars worth of oils and candies from Colorado.

    Had it in a false bulkhead in the trailer.

    but I don’t believe it was the feds. Just a cop doing a search of a suspicious vehicle during a routine stop, IIRC

    DeltaLady1946 in reply to OleDirtyBarrister. | November 1, 2017 at 10:56 am

    Just wondering….what does the word “PURPOTE” mean exactly???

      DeltaLady1946 in reply to DeltaLady1946. | November 1, 2017 at 10:57 am

      What does the word “PURPORT” mean please???

        ooddballz in reply to DeltaLady1946. | November 1, 2017 at 1:22 pm

        Definition of purport

        verb (used with object)
        to present, especially deliberately, the appearance of being; profess or claim, often falsely:
        a document purporting to be official.
        to convey to the mind as the meaning or thing intended; express or imply.
        the meaning, import, or sense:
        the main purport of your letter.
        purpose; intention; object:
        the main purport of their visit to France.

OleDirtyBarrister | October 31, 2017 at 6:22 pm

I am surprised that NE and OK have not revisited the effort to stop CO from exporting weed under the new admin by going after the AG and DEA.

The states did not get anywhere trying to sue CO directly in SCOTUS. The federal courts have not been receptive to litigation over the issue, and plaintiffs are having a hard time finding a theory the courts will entertain. But don’t let the POTUS bar trannies from the armed services, because the courts do not have a problem getting involved in national defense and security affairs after a tradition of restraint. LOL.

The federal govt, of course, could file an action for a dec judgment and an injunction and shut the states down instantly.

If I were a pot smoker in CA, why would I stop buying my pot from the local purveyor I’d have been buying from for years, and switch to a higher priced vendor approved by the local guvmint?

My guess is that I, as a buyer, would not be in violation of any state law against possession regardless of the source. So why do I care if the seller is licensed and paying tax? The days of worrying about paraquat (when the guvmit was trying to kill off pot smokers) are long gone, aren’t they?

If you want a brand spanking new black market, this is how it’s done. Greedy bureaucrats and over-regulation. The spread of hundreds of toxic waste sites in Oregon and Californica have already caused environmental disasters on public lands in both states.

Yes, all of the items listed in the article and other comments – Taxes, Federal Laws, no Insurance, no financing, etc. are a major deal breaker.

But this is what I see is the most problematic –

“But big gaps loom in the system intended to move cannabis from the field to distribution centers, then to testing labs and eventually retail shops.

The state intends to issue only temporary licenses starting in January, and it has yet to release its plan to govern the estimated $7 billion marketplace, the nation’s largest legal pot economy.

If businesses aren’t licensed and operating in the legal market, governments aren’t collecting their slice of revenue from sales. The state alone estimates it could see as much as $1 billion roll in within several years.

Operators have complained about what they see as potential conflicts in various laws and rules, or seemingly contradictory plans.”

The first thing that happens when you “go legit” under this state arrangement is that you become “known”, identified. You no longer have the option to continue to operate illegally and trust to luck and a sympathetic jury pool.

And you do that to join a system that seems to have MAJOR question marks still to be addressed. What will it look like when all these “known unknowns” become known? And what additional “unknown unknowns” will become known?

As with lotteries, gambling and other “growth” taxes, once many states get into the act, the value goes down. If more states go to pot…. revenues will drop. The legal pot has to be worth less than illegal pot to gain a foothold. If the hassle is too high… illegal pot makes a better business decision.

    I completely agree with you. But while important, I don’t see the taxes as most important. Everything is taxed and businesses adjust.

    The problem here is that no one knows what the rules are going to be. How can you know you are obeying the law, when the laws, and never mind the implementing rules and regulations haven’t been written yet.

    Good luck with that.

      The one rule CA is quite positive about is the taxes. The rest, the controls, the safety regulations, the mantle of legitimacy to allow the struggling pot farm to get insurance and loans, they could not care less about.

      It’s the gold that makes the rule. Once CA gets the gold, the rest of the rules can go to pot.

I own a small business (in a totally legal industry, by the way), and the government (at all levels), is already one of the things I spend an inordinate amount of with.

The situation described above scares me to death and would be an absolute non-starter.

One thing is some pot farms in one state (I’m fuzzy on which one) are not permitted to write off labor costs as expenses, thus slamming the pot farmer with massive income taxes on the falsely-optimistic ‘profits’ they make and the per-oz taxes on the end product.

I’m so glad I don’t even smoke, let alone smoke dope.

    Sanddog in reply to georgfelis. | October 31, 2017 at 8:23 pm

    The IRS goes after the industry with Tax Code § 280E. Basically, they’re saying you can’t maximize profit from drug trafficking through ordinary business deductions, but we want our cut.

OnTheLeftCoast | October 31, 2017 at 8:30 pm

There are California counties where the illegal grow is a major part of the local economy. I wonder what kind of taxes their reps are supporting on the legal grow, and how the county supes are thinking about taxes. Not to mention the urban pols whose funding base includes the local gangs.

In the end, it doesn’t matter if the state “legalizes” pot. It’s still illegal on the federal level and the feds can step in at any time and go after growers and sellers. That’s an unacceptable risk in my book. Plus, the legalization has a lot of unintended consequences. I’m a FFL and I recently was asked to do a firearm transfer for a local gentleman with a medical marijuana card. The idiot told me he had the card, he did partake and it was okay because it’s “legal” here. I did not conduct the transfer because it’s illegal for me to do so. Same for employment. It doesn’t matter if pot is legal in your state if your employer tests for drugs. Their liability is on the line and is more important than your right to get stoned.

    Florida just voted to legalize “medical marijuana,” and I’ve warned people of the same pitfall here. If you want to exercise your constitutional right to keep and bear arms, you might want to think twice about adding yourself to a government database of citizens who use what the Feds (including the federal background check system) still consider an illicit drug.

This was never about killing the black market in marijuana in California. It was never about opening up the market to legal recreational marijuana distributors and growers. It was all about keeping votes. Widespread use of marijuana is not good for a society. The same is true of the recreational use of other drugs, including alcohol. So, to control it, the state taxes it, just like it does with alcohol and tobacco products. This actually increases the state’s ability to control the product, as one essentially has to have a license to possess the product to begin with. Also, if you make the tax high enough, it will reduce the casual use of the product. And, the excuse for enforcement is not to kill some poor stoner’s buzz, but to collect the revenue which is owed to the state.

Then, of course we have the IRS. You can claim all of the money that you make from your marijuana business, but if asked, you have to prove where the money came from. And, if it derived from a criminal enterprise, which the cultivation and sale of marijuana is, all of the money from that criminal enterprise is subject to confiscation. Plus, you can go to prison. Yep, the marijuana industry is the place to be, alright.

My daughter lives in Humboldt County, pot central in Northern CA. Her husband is CHP and word on the street is the local growers have no intention of going legit.

It’s an open secret that pot growing is environmentally destructive. Ironic that so many of the protestors of the timber industry up there (who care for the land because they have to re-grow trees for the future) partake of a substance whose cultivation is so much more environmentally damaging.

Subotai Bahadur | November 1, 2017 at 12:54 am

Speaking from experience and as a retired Peace Officer here in Colorado:

1) the appearance of legality in any form stops all attempts at enforcement.

2) “legal” pot dealers not only have to pay the taxes on pot, they have to pay all the other taxes and put up with all the other regulatory barriers that the state can come up with to cripple and/or loot any legitimate business. Your street pot dealer does not have to pay rent, or pay minimum wage to any employees, or pay for Obamacare.

3) given the above, your illegal dealers will expand their business, and have cheaper supplies.

It seems our politicians are not students of history. Legalizing pot so far is following the same path as prohibition.

Both alcohol and pot were made illegal by hysteria about the harms of the drugs. Massive federal and local resources were expended for interdiction and the illegal, criminal trade bloomed.

When alcohol was made legal, the government taxed it a bit, but not excessively. The illegal trade mostly went away.

If pot is legalized, then the police have less cause or permission to confiscate it from consumers. How can they determine whether a joint is legally obtained or not?

High taxes will only make it easier for the illegal trade to continue. In the end, people will get their high based on the best quality at the best price.

High taxes will not bring high tax revenues, but it will enable Black Market sales and smuggling from other states.

Doubt me? Study the effect of high New York cigarette taxes.