Global Ganja Report

California's Gov. Jerry Brown has unveiled a special investigative force to go after unregistered cannabis growers. This is certainly bad news for the many growers who have failed to register because they consider the taxes and regulations burdensome. In the face of disappointing tax revenues from legal cannabis, is the state using the stick of enforcement rather than the carrot of lower taxes and more favorable regulations to bring more growers in from the shadows?

Gov. Jerry Brown proposed May 11 to create new teams in the California attorney general’s office to investigate the black market in cannabis production and sales that has persisted in spite of legalization taking effect in the state with the start of this year.

The Los Angeles Times reports that proposal came after registered cannabis companies complained they are being undercut by the illicit growers and vendors.

Brown's office said in a statement that the governor has allocated $14 million to "target illegal cannabis activity with an emphasis on complex, large-scale financial and tax evasion investigations." The teams are also to focus on "reducing environmental and other crimes associated with the illegal cannabis market."

The statement said four investigative teams are to be located in Los Angeles, Sacramento, Fresno and San Diego. A fifth team, focusing on interdiction, will also be based in Sacramento.

The proposal was openly welcomed by state-licensed firms. “We have consistently maintained, since full implementation of the licensing and regulatory framework in January, that additional enforcement is essential to addressing illicit activity,” Amy Jenkins, a legislative advocate for the California Cannabis Industry Association, told the LA Times.

However, Jenkins acknowledged that the state needs to also address "barriers to entry" to the legal industry, including what she called high taxes and regulatory fees. She also cited a complete absence of local authorization in many areas. She characterized these factors as "significant impediments to compliance in the regulated marketplace."

Indeed, full annual licenses for cannabis businesses are still not available from state authorities, and some 1,150 of the temporary applications have been rejected—overwhelmingly due to failure to win the required approval from local authorities. The Los Angeles Times itself has also noted in recent coverage that the expense and bureaucracy of procuring a license is a "headache" for many applicants due to high fees and requirements for upgrades to meet security and testing standards.

The LA Times' report on Brown's new proposal noted that the threat of federal interference in California's regulated cannabis industry is an obvious incentive to state enforcement.

A perhaps more cynical motive may be indicated by a May 10 report in the San Francisco Business Journal that cannabis tax revenue totaled a "disappointing" $34 million in the first quarter of the first year of Golden State legalization. So California is not nearly on track to rake in the $175 million initially predicted for the first half of the year by Brown's office. This reality was noted by the Legislative Analyst's Office, a body that advises the state legislature on fiscal matters. It said in a somewhat wry statement: "Based on this quarterly tally, we think that 2017-2018 revenue likely will be somewhat lower than the administration's January estimate."

The Business Journal notes that licit cannabis sales are slapped with a hefty 15% excise tax by the state, as well as an additional sales tax of 8-to-10 percent—which medical marijuana users don't pay. And that doesn't include local taxes that run from 5 to 15 percent. Oakland's sales tax rate is 9.25%, while Berkeley and Richmond are at 5%. San Francisco is one the municipalities that chose to not impose a local tax. But by state average, consumers are paying up to 45% in taxes when purchasing legal "recreational" cannabis. This means that buyers as well as producers have an incentive to stick with the black market that Proposition 64 was supposed to eliminate.

Cross-post to Cannabis Now

Graphic by Global Ganja Report 

Follow @GlobalGanjaRpt