What do you get when you essentially make Californians stay home for a year?
A lot of weed.
Pandemic binge-buying of marijuana sent California’s legal cannabis to new heights. Recently released figures for 2020 show that cannabis tax revenue surged last year, surpassing $1 billion for the first time after years of lagging behind initial projections when recreational use was legalized in 2016. That’s a big jump over $638 million for 2019.
Overall, California super-charged the national cannabis market, which surpassed more than $3 billion in tax receipts in 2020 nationwide, compared with less than $2 billion a year earlier.
“We’ve far surpassed revenues that we collected in 2019, and I attribute that largely to the pandemic,” cannabis lobbyist Amy Jenkins (known in Sacramento as “Pot Girl”) told me. “People stayed home, and they were consuming cannabis. You saw those huge figures in March 2020 when stay-at-home orders went into effect. You saw a sort of mad rush of people to purchase larger quantities.”
The billion-dollar figure for 2020 could turn out to be modest compared to where we’ll be with cannabis tax revenue within the next five or 10 years. Cannabis policy remains complicated, and in California, the rollout continues to be rocky, limiting potential. For example, nearly three-quarters of communities in the state don’t even allow for licensing stores to sell cannabis to the public, but more will opt this year to follow the green.
So, the question that comes to mind when hearing these big figures: Where exactly is all of this tax revenue going?
During the first few years of the legal-cannabis era, tax revenue fell below expectations, and a large share of the money gathered by the state went to administrative and setup costs.
“A lot of that money went to administrative expenditures early on to help stand up the regulatory framework,” California Gov. Gavin Newsom’s adviser on cannabis, Nicole Elliott, told me. “We’re not money-hungry when it comes to this endeavor. Our goal is to get the framework right. It’s not about money, it’s about good government.”
The California tax structure for the cannabis market is widely seen as burdensome, but officials are working to improve it. Currently, cannabis sold legally in California carries a 15% excise tax, plus the 8.5% state sales tax. Besides that, local jurisdictions generally add on their own taxes, some as high as 20%. The legal cannabis industry will pick up steam as the tax burden is lessened.
A big chunk of the cannabis tax revenue the Bureau of Cannabis Control allocates goes to grants to public universities to fund cannabis research, as stipulated in Proposition 64. In November, the first major allocation of funds‚ a total of $30 million, went to nine universities — seven in the University of California system and two in the California State University system to research cannabis.
It took years of saving up, $10 million a year, to reach the point where that funding was allocated, but that was in the awkward growing period. For example, a total of $4.6 million was sent to UC Berkeley for research projects, including on cannabis and wildfires and the impact of cannabis cultivation on salmon. A million-dollar grant went to UC Davis for study of “The Impact of Cannabis Use in Early Psychosis,” and nearly a million went to UC San Diego for research into “Evaluating the Impacts of Packing and Labeling on Cannabis Edible Use Among Youth.”
Another $30 million in revenue was sent to local communities “negatively or disproportionately impacted by cannabis criminalization” to fund existing social and racial equity programs. Oakland headed the list with more than $6.5 million in funding, followed by Los Angeles with just over $6 million and San Francisco with just under $5 million.
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“It’s our hope that these efforts lead to the creation of a truly diverse industry and that these programs serve as a blueprint for others who share in our commitment to address systemic discrimination and create real prosperity for all,” Elliott said in a statement.
Money also goes to the California Highway Patrol and local law enforcement to develop new ways of dealing with cannabis and cannabis users as well as local communities for youth anti-drug programs.
“There’s a common perception this is funding directed only at local law enforcement,” Elliott told me. “That came out as there was a national reckoning on funding for local law enforcement. I like to make super clear it’s not only focused on local law enforcement, it’s broader than that. I like to say it’s focused on local government. … I think there are so many possibilities for these dollars to be helpful to local governments in regulating their cannabis industry.”
Cannabis tax revenue will surge in the coming years not only because more municipalities will be opening up legal cannabis stores but also because more consumers will move to the legal, regulated market as opposed to the massive illegal, unregulated market, which experts estimate is still three to four times larger.
“I think the biggest turn of events will be additional licenses on the consumer retail side, whether it’s through delivery services or through legal dispensaries,” he added.
National developments will help speed that progress. The Trump years instilled justifiable paranoia in individual California cannabis entrepreneurs about the future, with lurid visions of Drug Enforcement Administration agents suddenly swooping in to shut down what in California is deemed legal activity, but that’s all behind us now. Recreational cannabis is now fully legal in 15 states, and only six states have made cannabis — even medicinal use — fully illegal. Still, cannabis businesses can’t even report expenses on their federal taxes or use traditional banks. From a business perspective, the industry needs major help.
Vice President Kamala Harris has, as they say in politics, “evolved” on the issue of cannabis. Her stance was against the legalization of cannabis early in her public career, but that has changed, and in the cannabis business community, there is a widespread belief that the former California senator will be a national leader on the issue.
“Cannabis has won dramatically in this last election, not just states legalizing, but also having a clean sweep for the Democrats,” says Gian-Paolo Veronese, vice president of cannabis distribution company Truth Enterprises.
Last year, the Democrat-controlled House passed the More Act of 2020, which would decriminalize cannabis use nationally, but the bill never advanced to the Senate, which was then in Republican hands. With Democrats in control again, some version of marijuana reform legislation is likely to pass this year. Senate Majority Leader Chuck Schumer has vowed as recently as early March to make it a priority.
“There is no doubt not having Mitch McConnell at the helm anymore and deciding if these bills go to the Senate or not is really huge for cannabis, and there’s going to definitely be a lot of movement on that,” Veronese predicted. “The question is: What are the bills going to look like in the Senate? Is this something that the president is going to make a priority? Because I know Kamala has definitely come around and is a proponent.”
National legalization, if it comes, is most likely at least several years away, but any momentum in that direction can be counted on to pull more investment and innovation into the sphere.
For many, the ultimate goal is the ability of cannabis producers to sell nationally and even internationally. Northern California is already famous the world over for its cannabis, and the prospect of refining high-end cannabis and marketing it, the way the Napa Valley has marked itself as a wine producer, could lead in intriguing directions.
It may take some creative work within the government. Cannabis advocate Adam Smith, founder and president of the Oregon-based Alliance for Sensible Markets, has a plan to try to boost interstate sales of cannabis that amounts to a workaround. Smith believes that President Joe Biden, beset by a dizzying array of urgent challenges, probably is a long way from signing national cannabis legalization.
Smith has a different way to move forward: cooperation between states to establish regulatory frameworks and agree to work together on cannabis sales. Specifically, he and others are hoping to get multiple governors to agree to an interstate compact to create a framework for commerce.
“The future of this industry is interstate,” Smith told me recently. “If two or more governors would agree, then it would go to Congress for a vote. Congress would have to approve it, but Congress wouldn’t have to negotiate it. The governors would negotiate it.”
The first challenge: getting two governors on board. One potential candidate is Newsom, but the chances of him diverting time and political capital away from Covid-19 and other urgent priorities is remote, at least in the immediate term. It would take major progress in the fight against Covid-19 and probably some leadership on the issue from state legislators.
In the meantime, life with the virus will continue to boost cannabis sales. And who knows, maybe even life after the virus, too.
