For more than a year, all eyes have been on the highly controversial and downright odd presidential election. But a number of equally important below-the-radar elections also took place today. These include a handful of votes to raise the minimum wage, and of course the nine states where residents decided the fate of either recreational or medical marijuana. The crown jewel of these voting states is California.
Proposition 64 in California aimed to legalize recreational cannabis for adults ages 21 and up, and it would impose a 15% excise tax on the retail price of marijuana. Growers would also be responsible for a $9.25-per-ounce tax for marijuana flowers and $2.75 per ounce for leaves. The only exception to the latter would be for medical-marijuana cultivation, which would avoid this new excise tax on growers.
Prop 64's decisive win
Based on the will of Californians, Prop 64 has won in a veritable landslide. As of 12:30 a.m. ET, with just 21% of the votes counted, the Secretary of State called the measure as passed, with 56% of residents voting in favor, compared with just 44% opposed.
What does this mean for the marijuana industry and California? For starters, California could be looking at an additional $1 billion in annual revenue collected per year thanks to the introduction of the two aforementioned excise taxes on retail sales and cultivation. Though this $1 billion only amounts to a very small fraction of the $171 billion budget approved this year, it'll still go a long way for the Golden State.
As was covered in far greater detail previously, the $1 billion in recreational tax revenue generated annually will go toward:
- Regulatory oversight costs.
- University oversight of implementation and regulation.
- Law-enforcement DWI protocols.
- Various social and medical programs.
- Medical cannabis research.
- Education and environmental programs.
Any additional revenue would be funneled into a general tax fund that would be used to:
- Educate children about substance abuse.
- Remediate environmental damage caused by illegal cannabis cultivation.
- Provide for further California Highway Patrol training programs to enforce DUI and DWI laws.
A win in California also opens the door for the cannabis industry to show Washington, D.C., what it can do. As it has the largest economy in the U.S. by a mile, we could now see financial institutions willing to work with in-state pot businesses to supply basic banking services, such as checking accounts and lines of credit. At the moment, just 3% of all national banks are willing to work with marijuana-based companies because of the fear of federal prosecution at some point in the future, but California's enormous economy could change those figures rapidly.
California is also a great example for lawmakers on Capitol Hill to follow. According to Gallup's latest poll, 60% of Americans want to see cannabis legalized nationwide, a new all-time high. Lawmakers, however, are taking a more wait-and-see approach. If California can demonstrate that it can effectively regulate its marijuana industry, then lawmakers could be more willing to rethink their stance in a few years' time.
Is there trouble ahead of California's marijuana industry?
However, a momentous marijuana victory in California has also opened up a veritable Pandora's Box within the state.
To begin with, growers are rightly concerned that Prop 64 could hand over the reins of the pot industry to big business, which is something most pot advocates are looking to avoid. Beginning in 2023, California is expected to begin selling Type 5 cultivation licenses to large businesses. Since large businesses have deeper wallets, they'd be in better shape to survive in a costly and tightly regulated industry.
But it's more than just Type 5 licenses that have smaller growers concerned. Prop 64 also allows the regulatory inspections to ensure that growers are sticking to environmental and production guidelines. Many growers in California have deemed these inspections as unnecessary and a hindrance to growth. Also keep in mind that growers will be forced to pay those aforementioned cultivation taxes on their product. It's possible growers could pass along these costs at the wholesale level, but if they price their product too high, it could chase legal consumers back to the black market.
On the bright side, industry consolidation could actually be a good thing for long-term investors looking to take part in one of America's fastest-growing industries. Investment firm Cowen & Co. predicts that legal marijuana sales could grow nationally from $6 billion today to $50 billion by 2026, and industry consolidation would allow investors the opportunity to find a few potentially profitable players. At the moment, the industry is too fragmented and unprofitable for investment consideration.
Will medical marijuana be cannibalized?
An even more disruptive issue could be the cannibalization of medical cannabis. With recreational marijuana being voted into law in the nation's largest state by GDP, there's little to prevent medical-cannabis users from bypassing the usual pathway of getting a prescriptions (i.e., seeing a physician first and getting a prescription) and heading straight to a dispensary once the infrastructure is in place. If medical marijuana were somewhat pushed to the wayside by recreational marijuana -- note that medical-marijuana dispensaries would still be needed for patients under age 21 -- it would be an even bigger incentive for big business to swoop in and gobble up market share.
In Colorado, one of the first states to legalize recreational marijuana, big businesses have been purchasing what few licenses are available. Given an ongoing moratorium on license issuances within the state, as well as no limits on the number of plants a facility can grow, these big businesses have been flooding the market with supply and pushing down prices. Though oversupplying the market and pushing down prices is a knock against margins, it could also be a smart move on the part of larger businesses to push out smaller players and deter new entrants. If it's happening in the much smaller Colorado market, it could easily happen in California as well.
There's no question that today is an exciting day for California voters and the marijuana industry as a whole. However, there are still plenty of questions left unanswered as to the future path the pot industry takes.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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