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Lessons from the California Adult-use Cannabis Industry for NJ

Cannabis advocate and industry leader Steve DeAngelo offered insight into the California adult-use cannabis industry. He discussed taxes and legacy operators so that New Jersey might learn.

The California adult-use cannabis industry has suffered due to high taxes and excessive red tape. It has caused many medical cannabis companies to go to the gray or underground markets.

“Even though we had legal medical cannabis in California, it was not regulated at the state level,” DeAngelo said.

Medical cannabis was legalized in 1996 under the Prop 215 state referendum. But no legislation was passed implementing regulations guiding the industry were put in place.

“In California, we had an industry that was built by the legacy community according to the values of the legacy community,” he said.

California Problems

However, the adult-use market rules contained significant barriers to entry.

“We’ve traded all that goodness for a completely broken system. That has made it impossible for people who love and know cannabis the best to participate in the legal industry,” DeAngelo said. “California over-regulated and overtaxed cannabis. They squeezed out of the cannabis industry most of the people who had spent decades of their lives building up the cannabis industry in California.

 “Legalization was a failure. People are still having grow rooms raided,” he added, calling it “Prohibition 2.0.”

“The legal industry is now dominated by a bunch of corporations who don’t know how to produce decent weed. In most legal dispensaries in California, you pay twice as much money for weed that’s half as good,” DeAngelo said. “The only people who do that are tourists and people who don’t have the intelligence to buy weed for half the price from their next-door neighbor.”

The California adult-use cannabis system seems to favor large companies. But “the large companies in California that have big bankrolls are starting to run into trouble because the system is so completely broken,” he said.

DeAngelo noted that under medical cannabis, his Harborside dispensary was supplied by 500 independent growers. However, once the adult-use cannabis regulatory regime was implemented, only ten growers became licensed for adult-use cannabis.

Many cannabis companies could not operate under the onerous rules of California adult-use cannabis and stay in business. So they opted to operate in the gray or legacy market.

The Cannabis Industry and Legacy Operators

DeAngelo noted the legal industry in California only accounts for 20 percent of the market. Thus, the legacy underground market is four times the size of the legal California adult-use cannabis market.

There is a great divide in the cannabis industry. It’s between larger, more established cannabis companies, many of which are Multi-State Operators (MSOs), and the legacy operators. Both sides think the other plays dirty.

“At the Benzinga conference in Miami, a speaker said the job of new cannabis companies was to cannibalize the legacy market. That’s exactly what they should not try to do,” Steve DeAngelo said.

It nonetheless reflects the widespread attitude. Those ideas are shared by many individuals connected to the large cannabis corporations that are Multi-State Operators (MSOs) who enjoy operating a cartel in an overregulated system that discourages competition.

“If they were thinking about any other industry, they wouldn’t use words like cannibalize. They would approach that industry with a great deal more respect,” he said.

Also the legacy industry contains a pool of great subject matter experts that the legal industry cannot otherwise find, DeAngelo noted.

“Legacy is not a theory. It is a fact. You can run away from legacy, or you can embrace legacy, or you can be run over by legacy. But we’re not going anyway. We’ve been here for 50 years,” he said.

Steve DeAngelo believes the government should pro-actively welcome operators into the California legal cannabis system.

There “needs to be an exchange of communications and a willingness and understanding that legalization that doesn’t succeed without legacy being included,” he explained.

California adult-use cannabis also has the same problem as New Jersey. Many towns are hesitant to allow cannabis or implement red tape that makes it impossible to find a viable location.

Burdensome Taxes on California Cannabis

Excessive taxation and regulations made operating and purchasing legal cannabis prohibitively expensive. That caused many companies to opt out of the legal California adult-use cannabis market.

DeAngelo said the new taxes caused people to run out of dispensaries with “sticker shock.” They then run to underground vendors. High taxes are also causing the opposite of the intended effect.

“Legalization in California is a failure. The tax revenue collected is 1/5 of what it should be,” he said. “The highest tax rate isn’t the optimal tax rate.”

California did eliminate the cultivation tax and lowered other taxes in June. However, not everyone believes sufficient progress was made on excessive red tape.

New Jersey has learned about the need to create a competitive tax rate. But it remains to be seen how welcome the legacy operators will be. The NJ Cannabis Regulatory Commission might want to welcome Social Equity and other prioritized applicants, but towns might not.

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