California opened the year by launching legal sales of recreational cannabis on January 1. And now that the first quarter is over, it’s about time the state gives us an idea of how its recreational cannabis market has fared so far.
According to the Department of Tax and Fee Administration, California made $60.9 million in tax revenue from marijuana sales in the first quarter of this year.
The agency said that the revenue collected by the state includes cultivation, excise and sales taxes, yet it does not include local tax revenue that was collected by its various counties or cities.
The breakdown of the cannabis taxes collected in the first quarter is as follows:
- California’s cannabis excise tax generated $32 million in revenue.
- The cultivation tax generated $1.6 million.
- The sales tax generated $27.3 million in revenue.
Medicinal cannabis is exempt from sales tax if the purchaser holds a valid Medical Marijuana Identification card.
It can be recalled that in November 2016, California voters had approved Prop. 64, otherwise called the Control, Regulate and Tax Adult Use of Marijuana Act. And in January 2018, a couple of new cannabis taxes came into effect: a 15% excise tax on the purchase of cannabis and cannabis products, and a cultivation tax imposed on all harvested cannabis plants that enter the commercial market
Cannabis and cannabis products are subject to state and local sales tax at the time of retail sale.
If you want to take a look at California’s tax guide for cannabis businesses, click here.
Early tax revenue is less than expected
Earlier this year, California’s budget forecasters expected legal adult-use sales to produce $175 million in annual excise tax revenue. However, sales in the 2018 first quarter totaled $34 million, underperforming this forecast. This translates to $136 million, which is $39 million less than what the budget forecasters expect.
The Legislative Analyst’s Office released this early revenue figure. This office is California legislature’s non-partisan economic policy advisor.
However, there are caveats that come with this number. First, California’s recreational sales started on January 1 with a limited number of fully licensed stores. Many of the dispensaries continued as medical cannabis-only stores until their adult-use license was granted, so tax revenue has been constricted by a limited number of open retail outlets. The revenue for the second quarter is expected to present a more realistic view of the market as most stores will already be up and running through this quarter.
Second, the issue of “cannabis deserts” emerged over the past three months, which further complicated the picture. Proposition 64 permitted local municipalities to set their own regulations with regard to cannabis businesses, and many cities and counties have opted to impose — at least temporarily — outright bans on all marijuana businesses.
Legalizing cannabis and taxing it will boost revenue a little
A new report has found that legalizing and taxing cannabis boosts revenue for both local and state governments, but no by a lot.
According to a study released by Moody’s Investor Service, legalizing the use of cannabis for recreational purposes brings governments more money than the costs associated with regulating it.
Despite the high taxes on legal cannabis sales, the revenue accounts for a little portion of government budgets. In Colorado, for instance, a cannabis brings in the about 2% of the state’s budget. In Washington state, the gross revenue from cannabis legalization is equivalent to 1.2% of the general fund revenue in the 2015-2017 state budget.
Most cannabis-legal states have earmarked the revenue for drug treatment, law enforcement, education, and other specific programs. This does not help the financial flexibility of the states.
In the same manner, the credit rating agency Moody’s described the revenue effect as minimal as far as local governments are concerned in states with legal recreational cannabis.