Collapse of Goleta-based cannabis business shows need for reform

August 13, 2023

OPINION by HIRSH JAIN

The recent collapse of HERBL is a warning signal to state policymakers about how urgently reform is needed to prevent a collapse in the California cannabis market.

HERBL is a leading California cannabis distributor based in Goleta that handled over $700 million in product sales last year.

But fixing the mess in California is not simply a matter of fixing bad policy.

It requires a move away from what has been a deeply performative politics, and towards a more substantive cannabis policy conversation.

One which treats cannabis regulation as a public policy question, where different policy approaches are compared based on how well they achieve stated goals.

Not merely as an opportunity to pronounce a set of virtues to the world.

Since adult use sales began, California has not treated cannabis regulation as a public policy question.

Instead, cannabis policy in California has primarily been an opportunity for policymakers to present themselves as supporters of certain causes or groups.

How well these (often important, worthy) causes or groups have actually been served by a certain policy has become almost irrelevant.

What policymakers are principally concerned with is taking a cannabis policy position that shows they are an ally of a group or cause.

There is almost a disinterest in how that policy is actually impacting the causes or groups that are allegedly of concern.

And so, many of the moral claims that have long been made by California cannabis policymakers now ring hollow.

It is the hollowness of these claims that ultimately led to HERBL’s demise.

California hails cannabis access as “essential.” But it does little to help ensure its citizens can legally access cannabis.

In March 2020, California Governor Gavin Newsom issued an Executive Order designating cannabis an essential medicine and retail cannabis outlets as essential businesses.

Newsom’s declaration has proved meaningless in a state that embraces strict local control and allows the vast majority of cities in the state to ban cannabis sales.

Most Californians cannot easily access a legal retail cannabis store, an allegedly essential service.

If this essential business were actually present in all, or even most, communities in California, HERBL would not have failed.

California levies the highest taxes on cannabis in the nation

California has adopted the maxim that “cannabis is medicine.” But its tax policy screams, quite the opposite, “cannabis is a vice.”

California taxes cannabis more than any other state. Cannabis is subject to a 15% state excise tax. And generally a 5-10% local excise tax.

These local and state excise taxes actually compound on top of hidden taxes. Local cultivation, manufacturing and distribution taxes, which the consumer never sees, have already inflated the pre-tax price of legal cannabis.

Applied last, California’s 9% sales tax compounds yet again on top of each of these previously applied taxes.

Legendary San Francisco medical cannabis activist Dennis Peron once proclaimed “all cannabis use is medical.”

If so, California is driving its own citizens to seek medicine that is untested, through illegal channels. Hardly honoring the legacy of Dennis Peron.

If most people in California were instead obtaining their medicine legally, HERBL surely would not have collapsed.

California’s dual licensing system promotes delays

California rightfully embraces the importance of social equity and racial justice in cannabis. But it also embraces policies that financially entrap those already victimized by The War on Drugs.

California can be proud to be amongst the first states to prioritize social equity and racial justice in its cannabis policy reform efforts. Intention counts for something.

But California’s dual licensing system generates massive bureaucratic delays at the local and state level. Applicants routinely pay rent on empty properties for years before opening their businesses.

As a result, social equity applicants often go bankrupt trying to open their businesses. Scarce business opportunities are then captured by the well-resourced, who — unlike social equity applicants — can endure these years-long delays.

In addition, cities that pass sweeping social equity laws often at the same time impose confiscatory taxes on their equity businesses.

Those few equity operators that manage to navigate California’s dual bureaucracy and get open cannot compete with the untaxed illicit market. Many are soon forced to shutter their businesses, often at a massive personal loss.

The distressed state of dispensaries such as these, and the retail supply chain in California generally, is in large part what led HERBL to fail.

California espouses a vision of a competitive market, in which small businesses can succeed. But it adopts policies that enable further consolidation in the cannabis market.

California recently awarded millions in research grants, funded by cannabis taxes, to study how to “reduce anti-competitive behavior” in cannabis, “uphold the ability of small businesses to compete in the legal market” and “prevent the creation of monopolies within the California market.”

These are laudable policy goals.

But there is a deep irony in the fact that these studies are being funded by the very heavy tax burden that leads small and medium-sized operators in California to become distressed. And then consolidated by larger operators.

California also recently awarded millions in grant funding to support the study of “the rich experience of California’s legacy cultivation community.”

Wonderful.

California regulators need to do a better job

But of course, California’s unforgiving regulatory climate has pushed most of those legacy farmers back to the legacy market. Or deterred them from entering the legal market in the first place.

And it is the continued strength of California’s legacy market that ultimately caused an operator like HERBL to fail.

California allocates millions of dollars to local jurisdictions to achieve critical policy goals like increased retail access and expedited local permitting. But there is limited accountability in how this money is spent.

In 2021, the California Department of Cannabis Control allocated over $17 million in grant funding to Mendocino County.

This money was intended to help the County process permit applications of local cannabis operators, who were attempting to navigate California’s onerous permitting requirements.

But in 2023, the Mendocino Cannabis Alliance reported that there was “a lack of public accounting on how these funds had been spent,” and that the funding had “yielded no clear outcomes.”

This case is not atypical.

If the funding California gives to local jurisdictions actually generated outcomes that matched the lofty headlines of the state’s funding announcements, the legal market would be much stronger.

And HERBL may not have failed.

While California no doubt suffers from bad policy, the lesson it provides the rest of the country runs much deeper.

The lesson is this: if we in this country truly care about remedying the injustices of the War on Drugs (as we should) or about other important policy goals, we need to move towards a less performative and a more substantive cannabis policy conversation.

One catered less to enabling the lofty announcements and career ambitions of policymakers whose sights are set on higher office.

One more narrowly focused on which policies actually serve the stakeholders that we say we care about.

That is how we can start to make meaning of HERBL’s tragic and unnecessary failure, in what was supposed to be the world’s greatest cannabis market.

Hirsh Jain is the founder of Ananda Strategy, which works with many of California’s leading cannabis retailers. Jain is also the Vice Chair of the California Cannabis Chamber of Commerce and on the Board of Directors at Cal NORML.