Thanks to overregulation and overtaxation, the U.S. government has blown the easiest revenue opportunity ever—legalized drugs. But it’s not too late to save the $72 billion cannabis industry from the perils of prohibition.
from San Francisco to Humboldt County, through a few cool redwood groves, Johnny Casali turns on a wood chipper and empties 55 pounds of pot into the chute. Casali grew cannabis illegally under the California sun for four decades. Now a state-licensed grower, he’s destroying what used to be his cash crop.
Some 95% of California cannabis cultivators operated at a loss last year, according to Jonathan Rubin, CEO of New Leaf Data Services, an institutional-grade wholesale price tracker. With the wholesale price of pot per pound in California down 52% since 2017, the year before legal recreational sales started in the state, squeezing out a profit is nearly impossible. The trouble boils down to simple supply and demand.
Amid collapsing prices, the legal weed industry shoulders a tremendous tax burden that its illicit competitors don’t. State taxes on retail sales are as high as 37%. And although marijuana remains illegal under federal law, Uncle Sam still holds out his hand for a big cut; pot companies are not allowed to take most normal business deductions, leaving them with an effective tax rate of 60% or more.
“What is legalization doing to small business owners like myself? It’s killing us,” Senter says. “It’sus.” By “legalization,” of course, she means regulation. Everyone loves the idea of a fair, transparent market. It’s the mandates and fiats that are killing legal weed—more specifically, the balkanized nature of those regulations. Without federal legalization, anyone trying to create a marijuana business at scale has to ponder 38 sets of rules, reporting standards and tax regimes.
Compare the difficulty of working within a state, across multiple states and amid a thicket of tax regimes with the established black market, which has to deal with none of that, and you can see why the typical person smoking a joint probably obtained it illegally. “There’s an economic disincentive to participate in the legal market,” says Emily Paxhia, who cofounded Poseidon, a San Francisco cannabis investment firm with $200 million in assets under management.
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