The state’s $141 million shy of the $175 million it predicted cultivation and excise taxes would generate by the end of the fiscal year.

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BY ED MURRIETA

SACRAMENTO, CA — California adults are not purchasing enough taxed-and-regulated cannabis to meet the state’s revenue projections for the first six months of legal, levied sales.

A report due Friday from the Department of Tax and Fee Administration will show the state collected $34 million in cannabis sales for the first quarter of 2018 — leaving the state $141 million shy of the $175 million it predicted cannabis cultivation and excise taxes will generate by the end of the 2017-2018 fiscal year, June 30.

The figures were published online Tuesday in a blog post by an economist at the state Legislative Analyst’s Office and are the latest indication that California cannabis consumers may be turning to the black market to avoid paying up to 45 percent taxes when local sales taxes are factored.

The Department of Tax and Fee Administration figures do not address local taxes, which range from 7.25 percent to 9.25 percent, and are tallied at the local level.  

In addition to black-market sales affecting state projections, lower-than-forecast tax revenues may be due to the number of California cities and counties banning cannabis businesses, and the late start of adult-use retail sales in Los Angeles, the state’s largest market.

Seth Kerstein, an economist with the Legislative Analyst’s Office, said the projected shortfall is difficult to interpret.

“Based our best guess prior to today, I think the numbers came in higher than we would have guessed,” he said. “We don’t want to over-interpret that but our best guess is we’ll finish 2017-2018 under $175 million. That has some fiscal implicaitons as to what the money’s used for but beyond that I don’t think we would characterize it as some obvious problem with what Californians are doing. I just think it’s difficult to esimate these things.”

Department of Tax and Fee Adminstration tax revenue figures emerged the same day Moody’s Investor Services said tax revenue from recreational cannabis states with established markets like Colorado, Washington and Oregon make up a small percentage of annual general fund revenue and in California’s nacent legal market that began Jan. 1, any tax revenue is marginally credit positive.

Meanwhile Tuesday, legislation that would reduce cultivation and excises taxes for three years to encourage consumer transition to the legal market, cleared its second committee and will advance to the crucial appropriations committee.

AB 3157 was introduced by state Assemblyman Tom Lackey, who said legalizaition is “off to a ragged start” because of state high-taxes and lower black-market prices.

Lackey’s bill would suspend the state’s cultivation tax, currently $148 per pound or $9.25 per ounce. It will also reduce the state’s excise tax from 15 percent to 11 percent. Both tax reductions would sunset in June 2021 after California’s regulated market has had time to mature. Lackey said the current tax structure places licensed businesses at a significant disadvantage to illegal retailers and illicit sources.

California cannabis industry veteran Debby Goldsberry said high taxes themselves are to blame for the shortfall.

“The intent of the law was to bring underground cultivators, producers and retailers into the new scheme, but setting the tax rates so high means that businesses who try to comply are left with an operational deficit for it,” said Goldberry, who runs Magnolia Wellness, an Oakland retail store , vape lounge and cafe. “Existing businesses had a dramatic increase in costs due to the expensive compliance requirements, and then we were hit with a loss of income at retail due to the cultivation and excise taxes.”

Goldsberry said cannabis stores have to set prices equal to or lower to the underground market just to remain competitive — but taxes send the prices even higher.  

“It drives consumers to purchase from unlicensed entities who supply products that have not been taxed at each level of the supply chain,” Goldsberry said. “Combine that with the added costs of compliance and cannabis businesses in the new regulatory scheme simply can’t compete. Why would people want to join such a flawed program?”