California: strong growth in legal cannabis sales, despite taxes and the black market

The state of California pioneered the legalization of medical cannabis in the USA and internationally, with prescriptions available to patients since 1996. Recreational cannabis has legalized in 2016. It is now the most developed and profitable legal cannabis market in the world. Indeed, California is on track to record sales of $3.1 billion for 2019, a substantial increase on 2018, which still saw sales of around $2.5 billion.

Taxes below forecasts

This year's sharp increase occurred «despite huge levels of taxation and regulatory issues,» said Tom Adams, managing director and principal analyst at BDS Analytics. State cannabis taxes include a 15% tax on purchases of all cannabis products, including medical cannabis. Municipalities are free to add sales and production taxes, which has created statewide tax disparities. «Any market in the world would be thrilled with a 23% growth rate,» said Adams. Yet before legalization, government analysts had predicted that California's coffers would be bolstered by taxes from cannabis taxes: a net $1 billion a year a few years after the world's largest market launched in 2018. The state only collected $74 million in cannabis taxes between April and June 2019, a respectable figure but well below forecasts.

The black market continues unabated

What's more, legal sales do not compete with the black market. Around $8.7 billion is expected to be spent on the illegal cannabis market in 2019, more than double the amount of legal sales. Legal cannabis is always more expensive than illegal cannabis, mainly due to state-imposed taxes, the purchase of licenses, and the costs involved in producing and packaging products. «The illegal market is competitive because legal cannabis is expensive to produce under Proposition 64,» said Dale Gieringer, director of NORML in California.

Despite this, California easily remains the largest legal market in the country, surpassing the $1.6 billion in legal sales projected this year for Colorado, which legalized recreational cannabis in 2014. There are currently 583 licensed cannabis stores in California, and 263 licensed home delivery companies. California's regulations have enabled the market to expand significantly, while respecting cannabis culture, with innovative businesses such as opening of the first Cannabis Café in early September, or the annual’Emerald Cup.