The business of legal marijuana is being the ruin of hundreds of growers and other businesses outside the industry in Humboldt
A legal marijuana grower, whom we will call John Smith, contemplates his three greenhouses, now empty, in the mountains of Humboldt County (California). He and John’s parents spent many years growing marijuana illegally before Proposition 64 of 2016 legalized recreational cannabis in the state.
His farm is accessible by a small road that John has had to pay with his savings to comply with the law. It is evident why John’s parents chose this place in the late 1970s to grow marijuana. The giant trees and blueberry bushes that his parents grew among the marijuana plants hid the plantations in the eyes of DEA helicopters. Now John no longer needs to grow blueberry bushes to hide his plants as they are legal. In fact, he withdrew them when California became the first state to approve medical marijuana.
Since that time, John’s farm has thrived in this three-county area known as the Emerald Triangle and considered a pillar of California’s economy.
In a good season John gets around 550 kilos of dried flowers of the best marijuana. This amount left him a profit of 1.5 million dollars. After paying taxes, fees and farm expenses, John can earn around $ 100,000 in net income.
This profit has allowed her to buy her own house, have a retirement account and a university fund for her children. In theory, businesses should have improved for John after voters approved Proposition 64 in 2016, legalizing recreational marijuana. But the opposite is what has happened.
Medical marijuana had few expenses and few rules to comply with. However, when moving to recreational marijuana, costs have multiplied. John lost money last year and had to use the money from his retirement fund and the college fund of his children to avoid closing.
A few years ago his retirement savings amounted to more than $ 80,000. After last year he has only about 500 dollars left. And it has not happened to him alone. As industrial-scale marijuana growers in places like the Central Valley of California have entered the market, recreational cannabis prices have been reduced by more than 50%.
Many growers have decided that they cannot afford to remain in the legal cannabis market
The high rates and the stricter rules along with the lack of access to bank loans have made Humboldt growers and Mendocino and Trinity counties have decided that they cannot afford to remain in the legal market.
Only 2,200 growers applied for cannabis licenses last year. It is a figure much lower than the 30,000 or more growers that existed at the time of the pre-legalization in the Emerald Triangle.
There is no data on how many have gone to the illegal cultivation of marijuana but it is known that 10 percent of producers have closed their business. But the worst has not yet arrived because it is estimated that this number will grow five times by the end of 2019.
The excessive regulations and the high costs of them make it almost impossible for the family business of recreational cannabis in this area. Many analysts believe that the era of cannabis in Humboldt, legal or not, is over.
John voted Proposition 64 thinking it would help growers. Now he thinks that he would not vote in favor again. When medical marijuana was legalized with the approval of the Compassionate Attention Act, some of the Humboldt growers did not want to register to vote and register because they had long considered the government an enemy.
However, many growers left the black market to grow in licensed medical collectives. The medicinal cannabis industry that existed from 1996 to 2016 had some regulations. There was a maximum of plants that a farm could grow. The number was decided by each county individually.
The growers had to apply for a license and pay state taxes. At the end of the 2000s, some cities began to apply taxes on local sales. But overall it was still a moderate amount of money.
On the contrary, with Proposition 64, marijuana became the crop with the most regulations in the country. Each plant has to be monitored through a central system called “tracking”.
There are state standards and county rules and requirements. Each county imposes standards ranging from additional taxes to environmental impact studies. Before the growers paid taxes on the income and sales of medicinal cannabis. Now you have to pay taxes before the plants grow, after they grow and after they are sold.
Certificates for each area and water board fees can cost between $ 3,000 and $ 5,000. But the biggest expenses are caused by the environmental and structural changes of the property.
For example, many farms have just discovered that their land is the habitat of some endangered species. When these growers ask for building permits in order to meet the requirements of Proposition 64, such as paved roads or new processing facilities that comply with the California Department of Agriculture, they are told they have to wait two years for a Environment Effect investigation.
However, even if a farm has a perfect infrastructure, that does not exempt you from paying startup costs. This is the so-called “canopy tax”, which is a tax imposed by the county in which the farm is located in which a grower will harvest and which must be paid before starting the crop.
In 2018 this tax was 3 dollars per square meter. There are many growers who have plots of between 15,000 and 30,000 square meters. Therefore, this canopy tax can cost many thousands of dollars.
On the other hand there is also the crop tax, which is a state tax on the amount of marijuana harvested before selling it. It does not matter whether it is sold or not sold; the tax has to be paid.
But in addition to the canopy tax and the crop tax, you also have to pay state and federal income taxes, the amount of which depends on the amount of marijuana that the producer sells.
In 2018, John Smith had to pay $ 300 for each kilo of dried marijuana flower as a crop tax. After paying taxes, what would have been a profit of $ 15,000 became a loss of $ 80,000.
A senior agricultural adviser in the county says that these growers are obliged to comply with rules and taxes that work with large producers but are the ruin of small family farms.
Another grower from Humboldt County, whom we will call Mary, says she can not hire temporary workers to help her harvest because to hire workers, the law requires her to install a bathroom for the disabled that complies with the Americans Law. Disabilities
Mary does not have the money to pave the road that leads to her farm and if the road is not paved, no truck will be able to carry the cement she needs. In fact, his mother, who is a 70-year-old woman, is helping her.
Mary, who is a second generation grower, has had to spend her life savings to pay state and local taxes. She applied for a license to build a rainwater pond to water her plants. Although all the required documentation was in order, the building and planning department told him that he also needed the license of his county. The county took 8 months to grant him the damn paper.
When they finally granted him the license, the county informed her of some obligatory additional expenses that in the end caused the costs to rise from 20,000 to 100,000 dollars. Mary could not pay so much money and, therefore, she ran out of the pond. The consequence of the lack of water was that Mary was only able to harvest around 10 or 15 percent of the annual yield, after having paid $ 53,000 in taxes and canopy fees.
Lack of access to bank loans
In any industry start-up costs and contingencies that may arise are paid through loans to small businesses. But in the cannabis sector access to bank loans is almost impossible to achieve. While the federal government of the United States continues to consider cannabis as an illegal substance, banks do not lend money in this industry. And besides, the growers cannot either take out crop insurance, or declare bankruptcy when the business goes bad.
The only loans that cannabis growers can access are private and have very high interest rates on capital.
Joanna McGregor, a farmer who spent the last 20 years of her life building her farm, located on a mountain, with no help other than her partner and her children, says that when she started the process of changing her status from an illegal grower to a cultivator She realized that the costs of bureaucracy were higher than the monetary value of her farm and much more than she could afford.
Therefore, Joanna decided to sell her farm and with the money obtained they bought land in a flat area near a river. Trust that when you build your new farm on a flat land near a river, you will not have to comply with the regulations of mines that were requested from your farm on the mountain.
However, the simple act of trying to build the same tank of water she needed for her farm in the mountains will cost her more than $ 50,000. But Joanna does not have that amount of money right now and she does not have access to a bank line of credit either. And also, she cannot discount the expenses of her business, such as 50,000, when it comes to paying federal taxes.
The government of the state of California realizes that taxes and regulations have been too big an obstacle for the cannabis sector. In fact, estimates of income from taxes derived from cannabis since its legalization have been too optimistic.
The state income from cannabis taxes in 2018 only amounted to 345 million dollars. However, the state believed that it would get a billion in tax revenue. In short, the state is collecting 30 percent of what was expected.
For the first time, the Humboldt County government has decided to charge marijuana growers the harvest tax after harvest and not before. With this gesture he hopes that farmers can pay with their income.
In Sacramento, State Rep. Rob Bonta and California State Treasurer Fiona Ma introduced a bill called the “Draft Law to Reduce Temporary Tax on Cannabis,” which unfortunately was not approved.
The bill wanted to suspend some of the taxes for a period of 3 years so that the growers could get some initial capital.
Unfortunately, the economy of Humboldt County has been severely affected by the legalization of cannabis. In fact, it lost income from sales taxes last year. In effect, last year total income fell by 2 percent in the period from 2017 to 2018, which is an amount of $ 424,000.
In Eureka County, income fell by 3 percent while in the state of California, in the same period of time, revenues increased by 4 percent. It seems that the problem is in the counties and the federal government more than in the states.
The problem is huge, to the point that the mayor of Eureka, the largest city in Humboldt County, has told the media that “For us, growing marijuana was such an important part of our economy and that Legalization has really been a disruption to the way we’ve been doing business for decades.”
The problem affects other non-cannabis sectors of the economy
And in addition, the problem affects the entire population of Humboldt County. Eureka has seen how taxes on cannabis sales in the last year have decreased too much because growers spend their money on tariffs and regulations instead of in the city.
This change in consumption has meant that some businesses outside the cannabis sector have had to close. A farm that hired 10 workers now can only hire three. The other seven no longer spend money in restaurants or other activities that have brought money to entrepreneurs outside the cannabis sector.
In the last three decades, cannabis growers in Humboldt spent their income in the local economy, either buying clothes or household goods, buying machinery and cars, or simply eating at local restaurants.
The Humboldt County Small Business Development Center conducted an unscientific survey of its members in June 2018. In this survey, many business owners selected changes in the cannabis industry as the reason for the economic decline above any other factor.
Annie Bignon, 37, owned a clothing store in Garberville. In 2017, your store experienced a 30 percent drop in revenue. But July of 2018 was the true beginning of the nightmare, when his store registered 60% less income than in the previous July.
Annie and her husband report that their city was a thriving community, with people who had an income to spend. In November of 2018, she and her husband decided to leave Garberville and open their store in another place, before they lost everything.
Currently the couple and their two children live in Sevastopol, four hours away. Her family was one of five who lived in the same block of apartments that had to leave Humboldt County for the same problem. More and more people are deciding to leave and all for an absurd financial policy in the cannabis industry that has affected the entire community.
We recommend reading our article called “The illegal cannabis market increases in California after legalization” in which we study the problem from other very interesting perspectives.
Cannabis producers have done a lot of good, such as donating money to restore the local Garberville school. But if things do not improve, many will leave. But many others will return to their origins: the illegal sale of marijuana.