Adjusting Assumptions About California’s Too-Sunny Revenue Forecast
By J.J. McCoy, Senior Managing Editor for New Frontier Data
Turns out, while Californians love their cannabis, that ardor is not quite enough to offset how much they dislike paying taxes for it. The shortfall has proven significant enough for New Frontier Data to revise our methodology for forecasting the growth from California’s 2018 rollout of its adult-use cannabis program.
Our latest sales projections for 2018 include $1.12 billion in medical cannabis and $805 million in adult-use sales, for total cannabis sales of $1.92 billion. By 2025, our expectations call for medical sales worth $760 million and adult-use sales of $3.96 billion, for total California sales of $4.72 billion. The Golden State will be worth 21% of total U.S. cannabis sales at an estimated $23 billion overall.
“We had previously assumed that two-thirds (67%) of all adult-use consumers would convert to the legal market by December 2020,” said Kacey Morrissey, New Frontier Data’s associate director of industry analytics. “However, given bans at the local level and the work that is still required to reduce the number of illicitly operating businesses, we now believe that only 40% of adult-use consumers will convert to the legal market by December 2020.”
Earlier this month, California Governor Jerry Brown issued a revised state budget plan in light of some disappointing first-quarter (Q1) tax revenues collected since the rollout of the state’s new adult-use program.Reported total cannabis excise-tax revenues collected between January 1 and March 31 reached $33.6 million, significantly behind pace to meet original expectations for collecting $175 million within the first six months.
“While the forecast assumes revenues will be phased in over time, preliminary data indicates revenue receipts are slower than anticipated,” state officials noted in the updated budget. “Cannabis revenue projections are subject to great uncertainty.”
Despite the much slower-than-expected Q1 pace, the governor’s new budget revision this month increasesthe anticipated tax revenue, to $185 million through Q2.
“To reach the newly expected goal of $185 million in tax receipts by June 30 would require 378% growth in retail sales in Q2 over Q1. Even given an expected ramp-up, that is extremely ambitious. And if the logic for the increased projected revenues after Q1 is based on increases seen in other legal states such as Colorado, it is still extremely ambitious, because Colorado had roughly only 40% quarter-over-quarter growth in the first year of adult-use sales. It did indeed show a ramp-up, but nothing near a 378% increase from quarter to quarter,” Morrissey added.
J.J. McCoy is Senior Managing Editor for New Frontier Data. A former staff writer for The Washington Post, he is a career journalist having covered emerging technologies among industries including aviation, satellites, transportation, law enforcement, the Smart Grid and professional sports. He has reported from the White House, the U.S. Senate, three continents and counting.