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California's Legal Pot Rush Falls Short For Dispensaries

SAN FRANCISCO (KPIX 5) -- Just one year ago, the arrival of legalized, recreational marijuana came with a good bit of celebration in California's cannabis industry.

One year later, that same industry is licking its wounds after a long, tough year.

"It's just obviously tough for any legal business with the taxes," says Katie Rabinowitz, general manager of Magnolia Oakland, one East Bay dispensary that managed to survive year one of the state's new cannabis rules. "You know the excise tax is something that's a big increase."

The struggle is something a lot of people saw coming.

This time last year, KPIX 5 crisscrossed the state of California, asking anyone who has anything to do with cannabis what they were expecting in 2018. The consensus prediction from that survey was best delivered by an entrepreneur in South Central Los Angeles.

"The problem we have right now is that the state and the cities see money, and they want to overtax," warned Donnie Anderson of the Southern California Coalition back in December of 2017.

That fear, over regulation and excessive taxation, did not take long to materialize. The first distress signals came from small growers in just the first week of March.

"I sold my farm yesterday," one farmer told a state commission hearing held in Ukiah on March 1st. "I didn't want to. I love this plant, I love this medicine, but the over regulation has stopped me from moving forward."

Not only was the high cost of entering the legal market stifling longtime small cannabis businesses, new rules were disrupting the supply chain. By July, testing requirements left many stores with shelves that bordered on empty.

With the wheels seemingly coming off, lawmakers in Sacramento tried to roll out plans for some cannabis market relief by rolling back the state excise tax.

"Those efforts were unsuccessful in 2018, and so a lot of work was left 50, 75 percent finished," explains Hezekiah Allen, a cannabis industry lobbyist working to reform state laws in Sacramento.

Ask him why California is well short of its cannabis revenue projections of $1 billion and he'll point straight to the law approved by California voters.

It was based on the idea of local control with laws changing at city and county lines. So local pushback, even at the neighborhood level, has dramatically downsized the California market.

"There's only 1,000 retail locations in a state that could probably be best served by 10,000 or more retailers," Allen complains. "That alone is a huge problem."

And it's not just retailers; the state is trying to collect revenue at every stage of the process, cultivation, transportation, manufacturing, and sales. It is, in effect, an economy that is not working systemically.

As Allen explains it: "If Californians are buying cannabis from unregulated sources, that means an unregulated transport company brought it there, and ultimately that means an unregulated grower produced it, so it's really a cascading effect throughout the state."

Those very same complaints continue to play out at the local level.

"If you want to bring a lot of people to Oakland and make sure that Oakland is a thriving cannabis market," Rabinowitz says from the counter of her Oakland dispensary, "you can't have the highest taxes in the state."

So excessive taxation, a resilient black market, and the infamous cash problem, when it comes to capitalizing on California largest cash crop there is a lot of work left to do.

And because voters delivered the law, any significant changes would raise constitutional questions for lawmakers. It is even possible that the management of California's cannabis market will ultimately end up back in the hands of voters. "At the end of the day," Hezekiah Allen says, "What we really need is a systematic comprehensive review and overhaul of the cannabis laws."

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