Gov. Gavin Newsom's latest budget projections harsh pot optimists' revenue vibe

California’s projections of cannabis tax revenue are coming down from their original highs.

State budget documents released Thursday by Gov. Gavin Newsom slash the administration’s cannabis tax prediction by $223 million through 2020. Industry analysts said tax revenue from the newly-legal weed business is lower than expected because of limited access to legal pot in parts of the state, the impact of taxes on price-sensitive consumers and the state’s entrenched black market.

By dropping its expectations of tax revenue, California is simply acknowledging those realities, said John Kagia with New Frontier Data, a cannabis research firm.

“It is, I think, a pragmatic confession that the state still has a lot of work ahead,” he said.

Kagia and other analysts were quick to discount another hypothesis for why California tax revenue is not as strong as previously predicted.

“Americans have a prodigious appetite for cannabis,” said Kagia. “This is definitely not an issue of constrained demand or demand falling short … It may be a slow, painful, teeth pulling process to get us there, but California will ultimately get there.”

California collects taxes on both the cultivation and retail sale of cannabis. The most-recent budget documents predict the excise tax will raise $288 million this fiscal year and $359 million next. That's well beneath a 2016 forecast by the independent Legislative Analyst’s Office, which predicted net state and local tax revenue from legal cannabis will eventually exceed $1 billion. 

Revenue from the taxes first goes toward covering the costs of regulating legal cannabis, followed by cannabis-related research.

The May budget revision proposes allocating the funds left over — an estimated $200 million — to three policy areas:

• $119.3 million for education, prevention and treatment of youth substance abuse
• $39.8 million to respond to environmental damage from illegal cannabis grows
• $39.8 million for public safety programs, including programs related to impaired driving

Greg Jelden, managing partner of the consulting firm Canna Management Group, said state budget projections never fully incorporated the persistence of the black market, nor how taxes levied on licensed businesses would put companies playing by the rules at a disadvantage compared to black market competitors.

“It wasn’t a surprise to me that projections were chopped down,” Jelden said. “What they didn’t take into account was the large and lengthy black market that we’ve had in California for a really long time.”

Jerred Kiloh, the president of the United Cannabis Business Association, said many consumers don’t know the difference between licensed and unlicensed dispensaries. Plus, Californians who visited medical dispensaries before Prop. 64 get sticker shock when they see the higher prices licensed cannabis retailers charge as a result of new regulation and taxes.

“People became pretty accustomed to just going to wherever there was a green cross,” he said, “and you don’t drop those habits by doubling the prices.”

Kiloh said consumers might have even more trouble distinguishing between licensed and unlicensed retailers because of advertisements touting illicit shops. His organization is backing AB 1417, which would require ads to list state license numbers and impose a $2,500 per day fine for every advertising violation.

Amy DiPierro covers business and real estate for The Desert Sun in Palm Springs. Reach her at amy.dipierro@desertsun.com or 760-218-2359.