With federal legalization now (perhaps) a far-off pipe dream as Republicans descend into the White House and Congress to assume full control of the government, one of the chief hopes for California’s badly ailing pot industry has (perhaps) been dashed.
While it wouldn’t solve every problem, by a long shot, federal legalization would at least open up new markets for cannabis companies that are prepared to import and export their products, and at least theoretically give a big boost to smaller firms, too, including local dispensaries.
With an unstable federal government led by a lunatic, it’s impossible to know for sure whether legalization might happen despite general GOP opposition. But the prospects don’t look good, and that leaves California pot companies sitting with the problems they’ve had ever since California voters legalized weed eight years ago (that is, but for a few bright spots, like during the worst of the Covid pandemic, when sales soared). And yet more problems might be on the horizon.
The bad news continues to pile up: bankruptcies, layoffs, cutbacks, high prices, thin profit margins and enormous losses. Public companies like the Salinas-based Lowell Farms have laid off tons of people (nearly half the workforce in Lowell Farms’ case). Lowell reported a loss of $3.6 million in its most recent quarter. Gold Flora, meanwhile, reported a quarterly loss of a swoon-inducing $18.8 million and the Costa-Mesa-based company is reportedly having trouble paying its debts (at least one lawsuit alleges that, anyway). The company also announced that it would be trimming its staff by 10%.
All that combined with other grim news led John Schroyer of the trade publication Green Market Report to wonder “how long until more of them join the conga line into receivership and bankruptcy?”
Probably not long. This situation is not what anyone expected (or promised) in 2016. The reasons for it are the same intertwined ones the California industry has been facing all along: high taxes, the state’s “home rule” provision (which allows local governments to ban cannabis companies from setting up shop), and the continued success of the illicit pot industry.
Some of these problems could be solved, or at least lessened, with government action. Lowering taxes, for example. But the state government is doing the precise opposite. The industry and consumers alike have complained all along about the state’s 15% excise tax on weed, which comes on top of the regular sales tax and any additional local taxes.
So with the industry in crisis, you’d think maybe the Legislature and governor would be looking for ways to lower it, right? Wrong. The tax is set to increase to an outright insane 19% in July barring some intervention in the Legislature in the coming session. This is part of the bargain that was reached in 2022 when the state eliminated the cultivation tax, which was itself ruinous—particularly for growers, but really for the whole industry.
Adding four points to the excise tax doesn’t seem like much of a bargain, though. All it will do is send more people back to the illicit market, and the ones who buy from dispensaries are refusing to pay more than they already are, meaning that the additional cost will be borne entirely by the industry.
There is a huge effort under way to forestall the increase, but it’s impossible to tell at this point how successful it might be. Dustin Moore, a founder of the Embarc chain of dispensaries, told Green Market Report that the potential increase represents “an existential threat to the industry.”
During a recent industry conference, Nicole Elliott, director of the California Department of Cannabis Control, told attendees that “reforms are needed,” and encouraged them to lobby lawmakers.
But efforts to lower the tax during years when the state government had a budget surplus went nowhere. Given that the state is now running deep deficits, with the Trump administration poised to stick it to California in several ways that would make things worse, the challenge will be that much greater. But so is the industry crisis, so maybe enough lawmakers and Gavin Newsom (who reportedly brokered the deal to trade one tax for another) will finally see the light.
