Local owners of legal marijuana dispensaries and grow operations bet big on the industry they assumed would be booming after California voters legalized recreational marijuana in 2016. Six years later, tax revenue has stagnated, and several Palm Springs dispensaries are up for sale. Court documents show one major grower in the city that once applied for a fivefold expansion instead found itself accused of defaulting on millions in rent and associated fees.
Looking back: When voters passed Proposition 64, lawmakers foresaw eradicating illegal pot and gaining increased tax revenue. Instead, the underground marijuana market is estimated to bring in about $8 billion annually, double the volume of legal sales. Cannabis license holders, of which Palm Springs has nearly four dozen, fear the “extinction” of the industry in the state.
By the numbers: Earlier this year, the state revised some of the cannabis taxes, getting rid of a cultivation tax and shifting the 15% excise tax rate from distribution to point of sale. The city collects another 10% tax on cannabis. There’s also a 9.25% sales tax.
- Using the city’s calculator, you can quickly see the fees add up. For every $100 spent on pot in a retail cannabis shop in Palm Springs, customers pay $138.
In addition to taxes, legal operations must contend with the cost of licensing, testing, and environmental impact.
- “If you wanted to open up a dispensary in Palm Springs right now, you’d probably need $1 million to $2 million,” explained Julie Montante, owner of 420 Bank along Palm Canyon Drive. “There’s just too many steps, and it’s not worth the money right now.”
Behind the scenes: While risky, cannabis consumers are well aware of their options. Illegal cannabis sellers can sidestep the enormous startup costs and taxes and thus offer a cheaper product to customers. It’s estimated that 75% of the weed consumed in the state is sold illegally.
- “All the cities should be going after the black market more,” Montante said. “Legal operations can’t compete with their prices.”
Why it matters: While several dispensaries are currently for sale on online listing sites, Palm Springs still has the most saturated cannabis market in the state. An analysis we conducted last year shows the city has one dispensary per every 2,100 residents. That means legal businesses are competing not only with cheaper alternatives but also in what Montante calls an “oversaturated” market.
- “There’s a lot that has to be done,” she said. “Lowering taxes would help and lowering licensing fees. I wish the city would consider a limit on licenses.”
Bigger picture: High taxes, onerous regulations, oversaturation, and a rampant illegal market could be why there’s a marked stagnation and even decline in tax revenue from cannabis in Palm Springs and other valley cities that allow marijuana to be grown and sold.
- From 2020 to 2021, several cities, including Palm Springs, Desert Hot Springs, and Coachella, saw their cannabis tax revenue nearly double as both cultivation and retail operations boomed. In Palm Springs, cannabis tax revenue jumped from $2.8 million to $4.7 million during that timeframe.
- But the city’s latest budget shows it’s on track for just 5% growth in cannabis tax this fiscal year and that a decline of about 4.5% is expected in the next fiscal year.
- It’s similar in neighboring Cathedral City, where cannabis tax revenue is expected to remain flat through 2023 at $7.5 million. In Palm Desert, a 14% increase is expected, and in Desert Hot Springs, a 12.5% increase is expected.
State of play: There are 250 cannabis businesses for sale in the state and eight for sale in Palm Springs and the surrounding cities, including The Row House, which attempted to stand out from the crowd by branding itself as a marijuana lounge in addition to a dispensary.
- The Row House held a ribbon-cutting ceremony attended by city councilmembers in late April after reportedly spending millions, but the business is now shuttered and listed for sale.
- Signaling problems with debt, one unnamed local dispensary is being sold “by way of court-ordered receivership.”
But wait: Kings Garden, which has multiple grow operations in Palm Springs and holds licenses for cultivation, manufacturing, and distribution, was once looking to expand one of its grow facilities by 175,000 square feet. Over the summer, documents show the business was accused of defaulting on $2.3 million in rent and fees owed to a real estate investment trust.
- Representatives from Kings Garden did not return emails or phone calls Tuesday.