Cannabis Tax Revenue In California Could Be Hundreds Of Millions Of Dollars Below Projections

The legalization of recreational cannabis was supposed to be a cash cow for California. But the state expects to bring in less money from taxes than previously anticipated — a lot less.

In January, Gov. Gavin Newsom’s proposed budget forecast $355 million and $514 million in excise tax revenues for fiscal years 2019 and 2020, respectively. The revised budget released last week reduced those projections to $288 million in 2019 and $359 million in 2020 — more than $200 million combined.

The burgeoning cannabis market has faced growing pains and competition from a persistent black market, which means less tax revenue coming into the state.

“I think that it’s clear that the legal market has been slower to develop than perhaps had been anticipated,” said H.D. Palmer, deputy director of external affairs for the Department of Finance.

Excise taxes are applied to cannabis cultivation and cannabis retail sales. At the point of purchase, customers face a 15 percent from the state — on top of sales and local taxes.

That adds up quickly for consumers, like Bobby Bañaga in Sacramento. But he says he isn’t surprised the state overestimated how much it would generate in tax revenues.  

“I think maybe their expectations were a little higher because of what happened in Colorado and the money that they brought in,” Bañaga said. “They were expecting the same, and they didn’t quite make it.”

According to Palmer, one challenge is the lack of historical tax data to use for forecasts. He says this year was the first time the state could project future cannabis tax revenues with a reliable set of numbers.

Proposition 64, which legalized recreational cannabis in 2016, directed the state to spend a portion of tax revenues on substance abuse prevention, youth programs and public safety. But Palmer says the drop in projected revenues won’t leave these programs underfunded.

“There’s significant resources and new resources that the governor has put into his revised budget on that,” he said.

The governor’s revised budget said cannabis tax revenue projections will remain subject to significant uncertainty in the near term.