Cannabis Leaders Send Urgent Letter to California Governor Newsom Demanding Change

An alliance of 20 leaders in the cannabis industry say the marijuana market is headed for an imminent collapse

Governor Gavin Newsome looking ponderous Source: Shutterstock

People in California’s cannabis industry have reached a breaking point. They say the laws governing the Golden State’s cannabis industry work contradictory to the public’s goals and are set up in such a way to squash the chance of a successful business model.

A group of over 20 cannabis business CEOs, cultivators, policy analysts, retailers, manufacturers, and more, joined together to reach out to Governor Gavin Newsom (D-CA), Senate President pro Tempore Toni Atkins, and Speaker of the Assembly Anthony Rendon. They sent those officials a letter calling the California cannabis system “a nation-wide mockery” and “a public policy lesson in what not to do.”  

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“We have collectively reached a point of intolerable tension and can no longer support a system that undermines public health and safety, maintains excessive taxation, threatens jobs, hinders growth and economic prosperity, and perpetuates a regressive war on drugs,” the letter reads. 

Nearly 30 people in the cannabis industry signed on to that letter, including the Director of the California branch of the National Organization for the Reform of Marijuana Laws and the President of a lobbying firm called Precision Advocacy.

The Black Market

In 2016, California voters approved Proposition 64, the Control Regulate, and Tax Adult Use of Marijuana Act. 57.1% of voters that year – nearly 8 million people – said they wanted people over the age of 21 to possess and use recreationally up to one ounce of marijuana flower or 8 grams of marijuana concentrate. 

One of the main intentions of Prop 64 was to decrease black market and drug cartel activity. The thought was that people would rather buy legal weed than go through illicit channels. 

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But there’s a problem. 

Prop 64 also levied two different excise taxes on marijuana. The first is a $9.25 tax on every ounce of marijuana; that goes in tandem with a $2.75 per ounce tax for marijuana leaves; plus a 15% tax on retail sales. The 20 cannabis leaders who are vying for change argue Proposition 64 set them up to fail because weed is taxed so heavily that it pushes people toward the black market. 

Those taxes compound, adding up as the product travels through each stage of cultivation, processing, transportation, and sale. As it stands, marijuana purchased legally costs up to 50% more than what someone would find on the black market, according to the group that gathered Friday.

They say that as a result, the illicit market is about three times the size of the legal one. That’s not only bad for legal business owners, it’s dangerous; recently, marijuana on the black market has been found to be grown with illegal and harmful pesticides and laced with dangerous drugs like fentanyl.

Another issue is that although California voters legalized marijuana, it isn’t available statewide. In fact, only about 30% of Californians have access to legal weed, the group argues. They say the state has just 2 dispensaries per 100,000 people – one of the lowest rates in the nation. 

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Fed Up

Jerred Kiloh, the Owner of Higher Path dispensary and President of the United Cannabis Business Association trade group, says the way things are set up right now dooms cannabis retailers.

“I did $11.4 million in retail sales, and my profit margin was $137,000, which was eaten up in an attempt to expand my business. So if you say ‘lucrative’ I think we need to adjust what our expectations of ‘lucrative’ are,” said Kiloh.

Darren Story, Founder of Strong Agronomy, says one of the main reasons cannabis was made legal was to squeeze out black market competition. The hope would be that legal operators can scale up and create economic margins that can compress and then reduce rates for consumers. That hasn’t happened, because the way the taxes in Prop 64 are set up keeps companies from being able to succeed by passing hefty costs onto the consumer.

A person counting money in their hands

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Story says he had to lay off half of his staff this year, and agrees that lucrative is a far cry away from the current state of affairs.

“I don’t know any farmers who aren’t just barely skating by,” said Story. “And it has to do with the fact that the margins continue to go up, even if we’re becoming more efficient. The consumers, they just look at the price and go, ‘Look, I could buy this from my friend on the street for 50% less than I can at retail. What’s my incentive to buy it at this price?’ If it’s only to make state coffers more expansive, then most consumers are going to take off.”

Story says the State is the only one coming out successful as things are currently set up.

Demanding Immediate Action

This group of cannabis leaders isn’t just frustrated; they’re scared. They say if there isn’t a change, the black market will only continue to grow, and people who choose to operate in the legal space will suffer continuously until they’re ultimately squeezed out of the industry. 

Wikileaf asked the group of 20 cannabis leaders at the news conference defending their cause what exactly they’d like to see happen immediately. 

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Taxes

Lindsay Robinson, the Director of California Cannabis Industry Association, says one of the fastest ways to help their situation is to change the tax system for marijuana.

“We are looking for an immediate suspension of the cultivation tax, which is an incredibly burdensome tax that compounds throughout the legal supply chain,” said Robinson. “We’d also like lawmakers through the legislative process or the budget process to consider suspending the excise tax or reducing the excise tax for the foreseeable future, until the legal market can start to grow and thrive.”

Retail Bottlenecks

Jerred Kiloh of the United Cannabis Business Association also spoke on the point of retail sales and accessibility of legal cannabis.

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“Pre-2018, before we had Prop 64 enacted, there were close to 8,000 dispensaries – brick and mortar. Current number is around 900,” said Kiloh. “We still have a lot of the same producers, we have a lot of industry operators who have entered into the legal industry. There are not enough retailers out there.”

Kiloh says he’s been trying to put pressure on the localities that haven’t developed laws to regulate marijuana to get moving. He argues that the more communities there are with access to legal weed, the more people there will be paying taxes on the product, which would allow the state to lower those taxes. 

MedMen dispensary in Venice, California

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Joshua Keats is the Founder and Co-CEO of Henry’s Original, and a legacy cultivator that’s been growing cannabis since medical marijuana was legalized under Prop 215 in 1996. He says the cost to produce legally comes without much profit. That’s largely because of licensing fees and strong environmental oversight.

“This really has to do with the state licensing a disproportioned amount of cultivation to retail dispensaries and an abject lack of enforcement of illegal and unlicensed cultivation. It has never been safer to cultivate cannabis illegally and for much cheaper than licensed cultivators can produce.” Keats said sternly. “And, of course, the egregious over-taxation that accounts for over 50% of the consumers dollar spent at a dispensary. There’s no way for legal license-complaint cultivators to compete with the illicit market because of the way the system has been set up by the state.”

Harm to Minority Communities

The group reaching out to California’s lawmakers argues that part of legalization was meant to right the wrongs committed to minority communities during the War on Drugs. Instead, the group argues the problems have only been perpetuated, supporting the black market and “inflicting significant harm upon Black, Brown, and LatinX communities.”

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Tiffany Devitt, the Chief of Government and Consumer Affairs for CannaCraft, says the state is not following through on the promises it made to voters who supported Prop 64. That ballot measure includes 26 statements of intent and purpose. Six of those statements refer to the elimination of the black market. Still, others refer to remedying the harm caused by the War on Drugs. 

“It is worth noting that fundamentally, what this group is rallying together to say, is the state is betraying its obligation to an active voter-approved ballot measure as it was written,” said Devitt.

Why Now?

Mikey Steinmetz, the Co-founder of Flow Cannabis Co. explains that this alliance of cannabis leaders was tactful in its timing for their request. On January 10th, Governor Gavin Newsom approves and releases his new budget. Steinmetz says that by sending this letter now, it gives the Governor time to gather up a two-thirds majority vote for a budget that includes new rules governing the marijuana industry.

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Devitt of CannaCraft emphasizes how strung out cannabis operators are feeling.

“A tax boycott is a measure of last resort, and what the industry is saying to the policymakers in Sacramento is that we are approaching a point where we have nothing left to lose.”

The group is preparing a rally in Sacramento in January of 2022 in a move they say is inspired by the Boston Tea Party. 

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