California Cannabis Tax Revenue Isn’t Meeting Projections, So Public Officials Are Getting Conservative With New Estimates

Earlier this year, in May, California Gov. Gavin Newsom’s office amended its 2019 and 2020 cannabis revenue tax projections: from $355 million to $288 million (in 2019) and from $514 million to $359 million (in 2020).

Something similar happened in Sonoma County, where supervisors saw a shortfall in tax revenue in the 2017-2018 fiscal year and adjusted the 2018-2019 fiscal year projections. The 2018-2019 fiscal year ended in Sonoma County on June 30, and the county had surpassed its conservative projection by nearly $1 million.

“The cannabis program is still relatively new, and the budget projections were conservative,” Sonoma County Administrative Analyst Hannah Euser told the North Bay Business Journal. “There was also an increase in permitted operations in industrial zones over previous years.”

In short: The cannabis industry continues to grow in California, but not to the point that public officials are feeling the confidence that comes with an anticipated tax wellspring. Part of this stems from California’s precarious position of having the world’s largest cannabis market burdened by high tax rates and regulatory costs—which keeps the illicit market thriving and the tax boon at bay.

Revenues from the licensed marketplace are up year-over-year, from 2018 to 2019, but not enough to satisfy early hopes for the state.

The Institute on Taxation and Economic Policy pointed out that California’s cannabis tax revenue is lagging behind nearly every other state that has legalized cannabis and built out a regulated marketplace. (Massachusetts is the only state that has opened the door to adult-use sales since California did so, and it’s the only state that is bringing in less revenue through cannabis taxes per capita). 

“This lackluster performance is partly due to the legal market’s short tenure … and partly due to policies that make it more difficult than average to open a legal cannabis store in California⁠—and easier than average to operate an illegal one,” according to research director Carl Davis.