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The Cannabis Industry Is Smoldering–Why?

Some weird purple marijuana plant

It’s been over a decade since states like Colorado and Washington moved to legalize marijuana. The move came with both shock and excitement that stemmed from many areas. On the one hand, cannabis supporters believed these events would lead to the eventual federal legalization of the substance. Governments saw the opportunity to generate new revenue streams while concurrently squashing illegal market sales. And existing marijuana farmers assumed they would be able to leverage their expertise into new business opportunities. Well, ten years later, none of these have really come to fruition in the marijuana market. And many question the viability of the future of the cannabis industry.

(Bold broke down the marijuana industry early on–check it out here.)

In recent months, revenues within the marijuana market have declined substantially with the industry coming off its “high.” But attributing this decline a single issue simply isn’t possible. In fact, a host of factors have combined to bring the future of the cannabis industry into question. Among the most notable ones include excessive regulations and taxes as well as inflationary pressures on demand. But these are only a reflection of a government overstepping their bounds in the marijuana market. As is often the case, excessive oversight over businesses leads to much more harm than good. And the cannabis industry is a prime example proving this to be the case.

“The once-mystical heart of the nation’s marijuana industry is dying, fast, strangled not by law enforcement but by the high taxes and baffling regulation.”

A Vicious Cycle of Government Greed

Prior to the legalization of cannabis use, recreational or medical, the illegal marijuana market thrived. Significant amounts of resources were invested by policymakers and law enforcement to counter these efforts. Ultimately, it seemed that legalization would prove to be the ironic solution to the problem. If marijuana was made legal, then consumers would happily turn to more socially acceptable retailers. But in the process, state, county and municipal governments became greedy. Not only were cannabis producers and sellers subject to sales and corporate taxes. But they were also made subject to countless cannabis-specific taxes at multiple levels of the supply chain. And combined with licensing and regulatory permit costs, they had little option but to raise their prices.

Understanding this, the future of the cannabis industry from a legal perspective deserves to be questioned. With prices increasing on the legal market, consumers once again turn to illegal suppliers with more favorable offerings. At the same time, farmers and retailers watching their profit margins shrink or evaporate are returning to their old approach. In states like California and New York, this is a real issue as the illegal marijuana market is outperforming the legal one. And in other states like Colorado, Washington and Oregon experiencing this earlier, they have reduced their level of marijuana taxation. Unfortunately, these efforts may be too little too late in some areas. Thus, the immediate future of the cannabis industry may again shift again back to illegal markets from legal ones.

“Weed companies really suffer from a double whammy when it comes to federal taxes,” said Manatt’s Famili. “One might wonder if there’s a disincentive for the feds to legalize cannabis in that regard.” – Anita Famili, Head of the Cannabis and CBD Industry Group at Manatt Law and Consulting

The Federal Dilemma

If it’s not enough that state and local taxes are strangling businesses, federal policies make it even harder. Notably, despite more than half the state embracing some form of legalized marijuana, it remains a controlled substance federally. For businesses in the marijuana market, that means they are unable to move their products from one state to the next across borders. Instead, they must create entire new entities and acquire new permits while losing many economies of scale. What’s even worse, however, is marijuana market companies cannot write-off their operating expenses or salaries on their federal income taxes. Because cannabis is illegal federally, these businesses are not recognized by the federal government. As a result, some companies lose up to 70% of their cannabis revenue stream to federal taxes.

Some marijuana buds in a beaker
The future of the cannabis industry is still bright, it just has to be handled smarter.

Understandably, this makes it difficult to maintain a business unless profits are sizable. Unfortunately, this is not the case for the marijuana market. With the change toward more liberal leadership in 2020, many cannabis companies assumed federal laws might finally relax a bit. They hoped for greater access to funding supports, and they hoped for some tax reforms. This led many to invest in production in anticipation of these changes, which increase cannabis supply. But when such events failed to occur, and inflationary pressure rose, profits were eroded secondary to a supply-demand mismatch. As much as anything, the gridlock at a federal level is why many are questioning the future of the cannabis industry.

“Businesses wind up being bought by much bigger businesses. And so you have a situation where you’re only going to have large corporate cannabis. It’s sad that they’re pushing people into that position.” – Layke Martin, Executive Director of the Nevada Cannabis Association

Regulation and the Demise of the Small Business

Between various levels of taxations and regulatory requirements, small businesses suffer the most. It has been repeatedly shown that such government intrusions into the market routinely target small over large companies. In the marijuana market, this is certainly the case since most small cannabis producers cannot weather profit and production fluctuations well. In addition, cannabis is not recognized as an agricultural product, so small farmers lack access to usual supports. And while some states promised production quotas and limited cannabis licenses, few have followed through. As a result, larger corporations thrive while small businesses struggle.

In looking ahead at the future of the cannabis industry, a current snapshot suggests consolidation and limited growth. The viable players in the legal marijuana market will likely be the “big boys” while smaller producers will be acquired. Likewise, unless changes occur, it is also likely that illegal markets will continue to prosper, undermining industry success. The bottom line is government oversight of the market is making matters far worse than traditional market forces ever would. Why if the future of the cannabis industry smoldering? Look no further than the government policies in place that were presumably supposed to support it.

 

The government wants your whipped cream–can you believe it?

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