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California is paying a price for the shaky rollout of its legal marijuana market.

State budget documents released May 9, 2019, show Democratic Gov. Gavin Newsom's administration is sharply scaling back what it expects to collect in cannabis tax revenue through June 2020 — in all, a $223 million cut from projections just four months ago.

The reduced income for the state treasury means that slower-than-expected marijuana sales are punching a hole in California's budget.

The diminished optimism for retail weed sales comes as shops continue to be undercut by a thriving illicit market, where consumers can avoid taxes that can approach 50% in some communities. Some lawmakers proposed a tax break in late January 2019 to stimulate sales in the regulated market.

Meanwhile, state regulators have struggled to meet the demand for licensing, and many communities have either banned commercial sales or not set up rules for the legal market to operate.

State regulators have struggled to meet the demand for licensing, and many communities have either banned commercial sales or not set up rules for the legal market to operate. Click To Tweet

Newsom said it was likely to take five to seven years for the legal market to reach its potential, a point that he has made repeatedly in the past. But he also pointed a finger at local communities that have been resistant to legal sales and growing.

“It takes time to go from something old to something new,” Newsom said in Sacramento.

“We knew (some counties and cities) would be stubborn in providing access and providing retail locations and that would take even longer than some other states, and that's exactly what's happening,” he added.

A grower tends to young marijuana plants at Loving Kindness Farms in Gardena, California, near Los Angeles. California announced May 9, 2019, that its budget must be revised downward once again on lower-than-expected tax revenues from marijuana sales. California previously revised its budget in January 2019. (Associated Press file photo/Richard Vogel)

Some cities have sued the state in April 2019 to block delivery services to localities where marijuana sales aren't allowed.

Josh Drayton of the California Cannabis Industry Association credited Newsom with taking a clear-eyed view of the slow-emerging market and scaling back tax projections accordingly.

“I think this administration is being more realistic about the challenges faced by the regulated market,” he said.

A projected windfall of tax revenue was a major selling point for legal cannabis in California. In fact, Proposition 64, the law approved by voters in 2016 that opened the way for legal cannabis sales for adults, outlined a long list of programs that would benefit from tax dollars collected from sales.

State taxes include a 15% levy on purchases of all cannabis and cannabis products, including medical marijuana. Compassionate-care collectives that donated medical marijuana to patients had to pay this tax, too. Local governments are free to add taxes on sales and growing, too, creating a confusing patchwork of rates around the state.

The market is growing, just not as fast as once expected.

The state projects the 15% cannabis excise tax will pull in $288 million for the year that ends in June 2019, and $359 million the following year. That's a cut of $67 million and $156 million, respectively, from the governor's January 2019 budget forecast.

It's now appears certain that the state will fall short of earlier projections, when it expected to collect $1 billion in new tax revenue annually from legal weed within a few years.

According to the state Finance Department, the excise tax projection was reduced after seeing no growth in the final quarter of 2018. Additionally, the number of places to buy legal marijuana remains limited.

Newsom himself is supportive of marijuana and the cannabis industry, the largest in the U.S. Seven of the top 15 markets for cannabis industry jobs are in California. During an interview in June 2018 with Marijuana.com, the predecessor of Weedmaps News, then-Lt. Gov. Newsom shared his thoughts on the prospects and challenges facing California's marijuana industry.


— Michael R. Blood

Feature image: Democratic California Gov. Gavin Newsom shows a chart of the state's budget projections during a May 9, 2019, press conference in Sacramento. Slower-than-expected marijuana sales have forced the state to scale back its budget projections. (The Associated Press/Rich Pedroncelli)

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