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California pot revenue is lower than forecast. Are taxes too high?

WEST HOLLYWOOD, CA - JANUARY 02: A customer reaches for cannabis products at MedMen, one of the two Los Angeles area pot shops that began selling marijuana for recreational use under the new California marijuana law today, on January 2, 2018 in West Hollywood, California. Los Angeles and other nearby cities outside of West Hollywood have not finalized their local permitting rules so licenses to businesses in those jurisdictions are yet to be granted.  (Photo by David McNew/Getty Images)
David McNew/Getty Images
A customer reaches for cannabis products at MedMen, a Los Angeles area pot shop, Jan. 2, 2018.

When California legalized recreational marijuana sales in January, a bonanza in tax revenue was expected. But so far that hasn't materialized — and ironically, some say revenue has been low precisely because taxes have been too high. 

Governor Jerry Brown released a revised state budget on Friday. It shows California's economic recovery delivering an $8.8 billion surplus, beating forecasts from earlier this year. 

But the picture wasn't so rosy for the state's new recreational marijuana industry. During the first quarter of 2018, the state collected only $33.6 million from its 15 percent tax on marijuana sales.

California Department of Finance director Michael Cohen said at a Friday morning press conference that revenues have been lower than expected. But, he said, "We are expecting that to turn over time and ramp up as more people get licensed and as more people get into the system."

Legal pot sales will have to increase sharply to meet the state's revenue projections of $185 million during the first six months of legalization, and $630 million in the following fiscal year. A report from the independent Legislative Analyst's Office earlier this week said the state might not even be able to keep up with an earlier, more conservative projection.  

Some licensed business owners in Los Angeles are not surprised by the disappointing tax figures. They say ever since they started factoring the state's tax into their prices, customers have been fleeing for much cheaper marijuana in the black market. 

"We just can't compete with these illegal dispensaries that are undercutting us," said Daniel Sosa, president of a licensed Los Angeles dispensary called La Brea Collective. 

When customers buy marijuana at a licensed shop, they pay the usual sales tax (9.5 percent at Sosa's shop) and local cannabis taxes (10 percent in the city of Los Angeles). Those taxes are paid on top of the state's 15 percent excise tax. Sosa said it all adds up to serious sticker shock for customers who see nearby unlicensed shops advertising much lower prices. 

Sosa thinks California needs to bring state tax rates down if it wants to see customers choosing legal sellers over the black market.

"If they make it lower and actually let us compete against the illegal dispensaries, then we would see a return of our long-time customers," Sosa said.  

bill to lower the state's tax rate from 15 to 11 percent is currently working its way through the state Assembly. It passed a vote in the Committee on Business and Professions this week. 

Committee chairman Evan Low said he voted to move the bill forward because, "It will help lawful cannabis businesses compete with the black market, which—as the dismal tax revenue numbers released this week prove — continues to thrive." 

However, Low said lawmakers should commit to revisiting the tax rate if revenue continues to fall short of what voters were promised under Proposition 64.