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Cannabis Problems Part 1: Colorado and Lower Sales

Weed industry in Colorado
Written by Sarah Friedman

A lot can change in 10 years, and through 10 years of running an industry, a lot becomes clear. When Colorado first legalized cannabis, it was one of the first states to do so. Now, 10 years later, more markets are open, issues of overproduction have surfaced, and the original tax structure has shown to be a major weight on industry growth and competitive measures. Right now, Colorado and its problems show us the current issues of today’s weed industry.

Colorado and cannabis legalization

Colorado was one of two states (along with Washington) to pass a recreational cannabis ballot measure during the November elections of 2012. Known as Amendment 64, this initiated constitutional amendment legalized the recreational use of cannabis in the state. This measure came six years after a nearly identical measure, failed.

How’d the vote actually go? 55.32% of the voting population was ready to take the step to marijuana legalization, accounting for 1,383,139 yes votes. On the other hand, 44.68% of the population preferred not to take that step, accounting for 1,116,894 no votes.

Amendment 64 didn’t come with all aspects of regulation formulated, but it did come with certain understandable points. According to the amendment, adults can have up to an ounce (28 grams) of cannabis, which they can also travel with. They can give that much as a gift too, so long as the recipient is at least 21. Adults can have up to six plants for home cultivation, though only half can be mature and flowering at once, and all marijuana from the plants counts as legal possession. Possession is for residents and non-residents alike (from a 2016 update).


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Funny enough, one of the biggest issues to plague the industry – high taxes, was not established in the original amendment, and was set in a follow-up ballot measure in 2013. At that time the residents of the state voted on Proposition AA, which was what instituted a 15% excise tax, and a 10% sales tax. That’s 25% in taxes that the public was okay with, and which the public likely didn’t understand would burden the burgeoning industry.

Colorado and overproduction 10 years after legalization

We just had the 2022 elections, meaning its been a full 10 years since Colorado became a weed legal state with an operational industry. It means we have about a decade of time to look at how the industry has moved and changed over that period, and where Colorado currently stands. Here are some of the important things to know.

Things aren’t going great in Colorado with its weed industry, and there are several factors at play. Colorado is experiencing a massive downturn in overall cannabis business, with a steady decrease in month-over-month sales data. Much of this problem stems from the same overproduction issue that has plagued other states like California.

If too much product is out there for any industry, the general price slides down. Cultivators want to get rid of their stock and wholesale prices get lower and lower with all the competition. In July it was reported that the $1,309/pound that was expected a year ago, went down 46% to $709/pound. Take a further step back and in January 2021, it was as high as $1,721/pound.

Though this isn’t the only time the market saw fluctuation, its previous low, in 2018, was higher at $759/pound. This new low in price is compounded by a reduction in overall sales for 12 months straight, also reported in July of this year. This is similar to most other legal states, particularly California, which has felt the burn of overproduction so badly, that it finally lowered its taxes.

Overproduction signals two things. First, it means a huge amount of competition between legal operators who are growing too much, but it also means a likely increase in black market production as well. Whereas legal operators are still required to attach the taxes set up through regulation (which affect final price), illegal operators aren’t bound to this, meaning they can drop prices faster in a comparable situation.

Issues with weed industry pricing
Issues with weed industry pricing

If prices worked completely in tandem with overproduction, then perhaps sales numbers wouldn’t have slipped as much. Lowered prices mean less revenue, but they also mean being more competitive, and attracting buyers who compare prices. A legal market price can’t always change as quickly as a black market price in response to an issue like overproduction, since legal changes are required to get the price down. So while overproduction has led to lower prices, there are limits to this, mainly because of taxation.

Colorado and taxes 10 years after legalization

The overproduction issue overlaps with one of the other main issues, taxes. And this issue has been an issue since the industry began, although its become highlighted by how overproduction affects price. Remember that 25% in taxes mentioned above which was voted in by the people? Not only is that already exorbitantly high, with the excuse of sin taxes used to propel it, but apparently the rate got higher.

The tax laws put in place all those years ago were not exactly final. Along with the explained 25%, and the additional 2.9% sales tax applied to all products, a 5% increase in the already existent statewide cannabis sales tax was levied in 2017, bringing it from 10% to 15%, and making for a total taxation of 32.9%. According to chief marketing officer Joe Hodas of Wana Brands in Boulder, “People don’t seem to understand that if we continue to add taxes and make legal cannabis more expensive, consumers will continue to (seek out) the black market.” Such is the case.

In a showing that not everyone catches onto mistakes, even as they become more obvious, Dan Pabon, a Colorado state representative who was one of the original lawmakers involved in constructing the early cannabis policy (and who then went on to work as general counsel for Schwazze out of Denver), said this:

“Colorado’s model has been wildly successful… And I say that because most of the states that have adopted recreational cannabis into their system have used, if not in whole, in part Colorado’s rules and regulations.”

Of course, most states are having huge issues, which makes this statement more than a little off; and separately frustrating in showing how those who write legislation are often way outside the realm of reality. In fact, very few in the cannabis world seem to be making money according to economists in the field. And coupled with recent actions like Canopy Growth in Canada selling its retail locations, Weedmaps cutting 25% of its staff, and the introduction of slotting fees that act as rent payments to dispensaries, and it seems that whatever models exist, really aren’t working that well.

Weed industry and included issues
Weed industry and included issues

In reality it’s shown to be an incredibly difficult industry for legal operators, and that has an affect on tax revenue numbers across the board. Though publications come out shouting about all this cannabis tax revenue, the better questions are, ‘how much was expected?’ and ‘can those amounts hold?’ When a novel industry is no longer novel, and better-priced options exist, should a government expect the same response from its people over time?

How bad are sales in Colorado?

Just how bad is the situation in Colorado? We went over the price per pound which has fallen around $1000 dollars within the last two years. What about overall revenue? In August it was reported that cannabis sales in Colorado were down to $150.4 million, a 2.2% decrease from July. However, that was the eighth month in a row for either very little sales growth, or a decrease. March had the highest sales with $162.5 million.

Sure, these don’t sound like small numbers necessarily, but when compared to past numbers it becomes clearer that there’s an issue in the Colorado weed industry. Consider that in July 2020, numbers were as high as $226.4 million. That’s a $76 million drop from that time till August of this year, and a 33.6% overall decrease. Maybe this is why Colorado is now going full force with psychedelics, exemplified by a pre-emptive MDMA legalization, and a voted-in measure by the public for legal entheogenic plants.

If overall sales are down, it also means government revenue is down as well, as taxes can’t be collected if products aren’t sold. In 2021, the government of Colorado earned $423.5 million from cannabis taxes and fees. This year going through September, the state brought in $251.7 million, which means a likely yearly haul of no more than $313 million. In terms of total yearly sales, 2021 saw $2.2 billion for the year, whereas 2022 through September has so far only reached $1.2 billion, making for an expected yearly total of not more than $1.5 billion. And both estimates are if sales don’t go down more.

Though there’s nothing saying the industry can’t rise back up, there are definitely some things to consider; most importantly, pricing. Though overproduction has certainly led to price drops, even these drops can’t compete with the black market. If Colorado really wants its industry to rise again, (which means taking back money it was previously diverting from the black market), it will have to lower taxes to be competitive. Or hope for a miracle.

Conclusion

Colorado and its issues with the current weed industry, highlight what all legal markets are up against right now. A lot has happened in 10 years, what can we expect in the next 10?

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Check out more problems in the cannabis industry with

Cannabis Problems Part 2: Layoffs in The Industry

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About the author

Sarah Friedman

I look stuff up and and write stuff down, in order to make sense of the world around. And I travel a lot too.