California‘s marijuana market was supposed to be the industry gold standard — a multibillion-dollar success story and template for others to follow.
Not only did the state fall short of expectations, but it has turned into a cautionary tale of an overregulated, overtaxed disaster.
That is bad news for Gov. Gavin Newsom (D-CA), who supported the push to legalize marijuana and has bragged about San Francisco’s Amsterdam-style cafes. The harsh reality is that more and more cannabis producers and dispensary owners are being driven out of business, and the once-thriving industry is in serious need of a lifeline.
“The cost of compliance is just too high,” Joshua Kesselman, publisher of High Times magazine, told the Washington Examiner.
A string of broken promises by the government, legislative missteps, and burdensome regulations and taxes have left many growers and dispensary owners struggling.
‘Complete failure’
For the first time since recreational marijuana was legalized nearly a decade ago, more people are leaving California’s cannabis industry than entering it. There are now 10,828 inactive and surrendered cannabis licenses in the state and only 7,975 active ones, according to the Department of Cannabis Control’s data dashboard.
Jonatan Cvetko, executive director of the United Cannabis Business Association, said the new figures show that California’s entire regulatory cannabis framework has been a “complete failure.”
Taxable cannabis sales in California have also dropped to $1.09 billion for the first quarter of 2025, down 30% from its peak in early 2021 and the lowest quarterly sales in five years. It is a huge fall for an industry that was pitched to voters as a can’t-miss opportunity.
“California’s legal cannabis market launched with enormous promise, but it’s been undermined by structural flaws that make it very challenging for legal operators to compete,” Justin Brandt, founding partner at the leading cannabis law firm Bianchi and Brand, told the Washington Examiner. “High taxes and regulatory burdens have driven up costs for businesses, while enforcement failures have allowed the illicit market to thrive. California is known globally for its cannabis, but without a level playing field, that legacy will likely remain underground.”
California voters made recreational cannabis consumption legal via a 2016 ballot measure known as Proposition 64. Supporters of legalization vastly outspent opponents, raising around $23 million. Backers included marijuana companies and tech entrepreneurs, such as Sean Parker, the founder of file-sharing service Napster. Opponents spent less than $2 million on their anti-cannabis campaign. The measure passed with 57% of the vote, and California became the fifth state in the nation to legalize the drug.
‘Green rush optimism’ with a side of ‘delusion’
Then came the “green rush optimism” that took over the Golden State as well as “a bit of collective delusion,” Jonathan Caulkins, professor of operations research and public policy at Carnegie Mellon University, told the Washington Examiner.
“Growing cannabis, when you can do it legally, is very, very different than when you have to hide, and so any brand new industry created by big technological innovation brings in this rush of people trying to get rich,” said Caulkins, who wrote the book Marijuana Legalization: What Everyone Needs to Know. “When people rushed in, a lot of them looked at the old prices and said, ‘I can beat that price,’ but they didn’t fully anticipate the extent of which there was going to be a big price collapse.”
Then California’s cannabis market, which was born in the Wild West era of local oversight, collided with a confusing state regulatory framework layered on top of municipal rules.
“The combination of high taxes, unlimited licensing, and inconsistent enforcement made it difficult for small operators to survive,” Cannabis Business Advisors CEO Sara Gullickson told the Washington Examiner. “What we’re seeing now is a natural market correction, where only the most well-capitalized and compliant businesses can withstand the cost structure.”
Mega-cannabis corporations, some with questionable labor practices, have pushed out smaller craft operations, lowering their prices so no one else can survive and then raising them back up when they are the only ones left. Despite cannibalizing legal competitors, the mega operations are now dealing with something far worse: the unprecedented rise of the illicit market.
Black market competition
California’s cannabis initiative was sold on the promise that a legal market would cripple the drug’s outlaw trade. That did not happen. Instead, it triggered a surge in illegal cannabis that the state officials had never before seen and to this day have been ill-equipped to fight. Illegal producers are not only pushing legal operations out of the market space but are also running their own with armed guards and engaging in severe worker exploitation.
A 2022 Los Angeles Times investigation found that cannabis workers often had their wages withheld or stolen and were forced to live and work in dangerous conditions that led to some even dying on the job.
According to the University of Minnesota’s 2024 Gender Policy Report, about 96% of cannabis workers are Latino, and, of those, about 51% are undocumented immigrants. California’s cannabis farms, both legal and illegal, are reliant on migrant workers.
“Despite their acknowledged presence in cannabis farming, undocumented immigrants and U.S. visa holders working in the cannabis industry are deemed ‘drug traffickers’ by the Department of Homeland Security,” according to the report. “An undocumented immigrant worker who is found to have worked in the cannabis industry, or convicted of possessing more than 30 grams of cannabis is at risk of deportation.”
Workers say an association with the cannabis industry can also hurt their chances to improve their immigration status under the U.S. Citizenship and Immigration Services Policy Manual. So some work in inhumane conditions, never speaking up for themselves and enduring everything from physical to sexual harassment or assault. Female workers make up about one-third of California’s agriculture sector, and it is estimated that up to 80% have experienced sexual harassment or assault on the job, according to the report.
Rogue cultivation centers in Mount Shasta Vista, for example, have taken over entire rural communities. The vast majority of operations there are unlicensed, and their products are often contaminated and sold on the black market for a fraction of the cost.
Illegal cannabis stores supply the majority of cannabis consumed in the state, according to government estimates. That has resulted in California’s low per-capita sales and starved legal cannabis stores from attracting the customers they were promised.
Cheaper options by unlicensed growers make up about 60% of the cannabis sold in California, according to a report from the state’s Department of Cannabis Control.
“Unlicensed operators avoid taxes and regulatory expenses, so they can offer products at a much lower price point,” Vince Ning, co-CEO and co-founder at Nabis, the leading licensed wholesale platform for the cannabis industry, told the Washington Examiner. “Consumers, especially in a high-cost state like California, often make purchasing decisions based on affordability.”
‘Unforced error’
Caulkins said the “single biggest mistake” California made was thinking that legalization was the right time to stop doing law enforcement and called the move “backwards.”
“When there is no legal industry, the law enforcement has a really big challenge because it’s hard to make the market disappear completely,” he said. “But once there is a legal option, then enforcement against the illegal suppliers should be able to put them in a competitive disadvantage and at least have legal suppliers supporting the great majority of the market. California failed big time in that. That was the biggest unforced error, allowing people who weren’t following the rules to put their stuff out on the market. If you don’t follow the rules, you can put your stuff out at a lower cost. For example, if you’re not withholding payroll taxes, Social Security … it’s costly to follow all the rules like an excise tax on cannabis … and California allowed people who were not following those rules to compete with people who were. It’s not fair to the licensed producers.”
Tax hikes and state politics
To make matters worse, California’s cannabis excise tax increased on July 1 from 15% to 19% as part of a political deal struck by Newsom three years ago. But the industry, citing sharp declines in revenue and unfair competition from the illicit market, has complained that the increase is too high and will force even more people out.
The tax increase stems from a law signed by Newsom in 2022 that eliminated the state’s controversial cannabis cultivation tax. The measure included a trigger requiring the state to raise marijuana taxes if overall collections fell short of replacing the lost cultivation revenue. With legal sales in decline and tax receipts dropping, the state is now obligated to raise taxes on all legal cannabis purchases to close the shortfall.
Eli Melrod, founder of dispensary chain Solful, told GreenState that the tax increase will only make legal retailers’ lives harder.
“The high taxes in California already make it difficult for the legal market to compete with the illicit market,” Melrod said. “Increasing the excise tax will only exacerbate this problem as consumers will face even higher costs when purchasing their cannabis from legal storefronts.”
Newsom, who wants to start using part of the cannabis tax revenue for enforcement against illegal cultivation, and Assembly Speaker Robert Rivas, a Democrat, supported a push to pause the excise tax increase. However, they could not get Senate President Pro Tempore Mike McGuire, also a Democrat, on board.
McGuire acknowledged that “taxes on California’s over-regulated cannabis industry have been a train wreck for years,” but raised concerns about the fiscal implications of freezing the tax.
State analysts estimate that increasing it to 19% could yield about $180 million per year for the state.
“It’s important to acknowledge that any freeze will create a budget shortfall which would impact critical community programs funded by cannabis tax dollars,” McGuire said in a statement.
Amy O’Gorman Jenkins, executive director and lobbyist for the California Cannabis Operators Association, has pushed back on the tax increase, saying, “You can’t squeeze blood from a stone.”
Apart from the excise tax, Cannabis retail sales are also subject to the state’s sales tax rate of 7.25% and local taxes that are often based on a percentage of gross receipts and vary by business type. And because cannabis sales are still prohibited federally, cannabis-based businesses cannot deduct standard business expenses such as rent, wages, and marketing from their taxable income. They can only deduct the cost of goods sold, which makes their tax rate much higher than someone operating a non-cannabis business.
Regulations
Adding to the headaches and soaring costs are a laundry list of regulations that include a complex system of state and local licensing, strict operational and security requirements, and a seed-to-sale tracking mandate. All products must also be sold in child-resistant packaging and tested by a licensed lab to verify their potency and that they are free of contaminants.
CANNABIS SHOPS FACE CLOSURE OVER ‘ERROR’ BY STATE REGULATORS
For some marijuana growers, not only are they required to be in compliance for a cannabis license, but their farms must be up to code with multiple state agencies such as the Water Resources Control Board, the Department of Food and Agriculture, the Department of Fish and Wildlife, and more. Trying to keep up with them all has forced some to hire consultants or full-time office managers, or in some cases, both.
Dan Golden, who has a 70-acre farm in Humboldt County, told the Nation that times are so tough that almost all of his profits will go toward his defaulted mortgage this year and that he hopes he will not have to get a second job in the winter just to survive.