.Pot Shots: Frozen In Time

As 2020 dawned, most observers of the California cannabis industry expected it to be an eventful year for the legal-weed business and it was–but not in a way that anybody expected.
Over a swoon-inducing couple of weeks in March, when Bay Area and state officials issued shutdown orders as the Covid-19 pandemic took hold, it looked at first like the industry, forced to shut down, might sink into oblivion. Soon enough, though, county and state governments declared cannabis to be an essential business, saving the day.

Before all of that, however, most people thought the industry’s struggles pre-pandemic were poised to either get much worse or better, depending on what happened in Sacramento. Various bills to lower tax rates and relieve the regulatory burden had been, or were about to be, introduced, but Covid-19 forced the Legislature to prioritize only three kinds of bills: those related to the state budget, homelessness, and Covid. Cannabis-policy reform was very suddenly off the table.
That left the industry in something of a holding pattern, where it remains today, with everyone hoping for reforms in 2021.
The bad news, from the industry’s perspective, is that taxes are still too high, and regulations still too tight. The good news is that sales have held steady or increased, thanks in part to deliveries and curbside pickup still being allowed in most places. People stuck at home with their Netflix subscriptions and their munchies from Amazon Fresh want their weed.
In fact, demand shot up in the weeks and months following the initial stay-at-home orders. It then leveled off some, but it remains “significantly elevated” in nearly all California markets and across the country, according to a end-of-year report from New Frontier Data.
In California, tax revenues from cannabis sales more than doubled, from about $60 million in the fourth quarter of 2019 to about $135 million in the third quarter of this year. This is all good news for an industry with razor-thin profit margins that was in danger of total collapse less than a year ago.
Prices remain elevated, too, which is a bittersweet pill for cannabis businesses. On one hand, that’s a good sign for the industry because it’s largely due to higher demand. But it also means that consumers, already put off by high tax rates, are that much more likely to opt instead for buying pot on the illicit market, which in California commands as much at 80 percent of total cannabis sales.
This year also saw a push at the national level for reform, and though the needle moved only modestly in that area, it became clear that Americans, and most of the politicians who represent them, favor legal weed, even if it’s just for medicinal purposes.
The House passed the MORE Act, which would decriminalize pot and expunge cannabis-related convictions from the criminal records of many people in the U.S. But the MORE Act, like other efforts at pot reform, has stalled in the Senate, where Republican Majority Leader Mitch McConnell has used cannabis as a cudgel against Democrats even though reform is supported by a majority of both parties.
Meanwhile, four states legalized pot for adult use in November, bringing the total to 15 states plus Washington, D.C. who let grown-ups decide when to toke or not. Mississipians voted to approve a medical marijuana program, becoming the 35th state to do so. Now, most Americans have access to legal cannabis in one form or another.
For California, hopes for the coming year are essentially stuck in time, roughly the same as they were at the beginning of 2020.
The state’s 15 percent excise tax will be hotly debated in the Legislature, as will the additional tax on cultivators, which many observers say is choking the industry. Gov. Gavin Newsom has signaled that he’s open to lowering the excise tax, and it seems likely that it will be reduced at least a little. Sentiment seems favorable for either eliminating the cultivation tax outright, or at least cutting it significantly.
Of course, all this is contingent on the absence of more bad news, like the pandemic getting worse instead of better in the first part of the year, the economy going down the tubes, or some other calamity.
And if 2020 has taught us anything, it’s that we should expect the unexpected, and plan accordingly.


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