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For Legal Cannabis, 2019 Was a Big Pain in the Annus

Taxes, regulations, and the continued federal illegality of cannabis has stymied the growth of a promising industry — for now.

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Judging by some of the headlines and industry chatter, you might be forgiven for believing that the legal-cannabis industry is about to implode. Particularly in California, but really everywhere, 2019 is widely seen as having been a gloomy year for the pot business. Bloomberg News not only labeled 2019 an "annus horribilis," but also declared that "things are expected to get worse before they get better in 2020."

Which is probably true. And for people losing businesses and jobs, or barely holding on, and even for the many of the investors at whom Bloomberg aimed its story, 2019 has obviously been a pretty horribilis annus. For the rest of us, it might help to consider that, despite all the challenges and roadblocks, the industry has nowhere to go but up, and that large swaths of the industry are thriving even now.

It would also help to consider context: "annus horribilis," despite sounding like an ancient Latin phrase, is actually a relatively modern one. It didn't become widely used until the late 19th century, when the Church of England applied it to 1870, the year the Roman Catholic church codified the pope's infallibility. From a sufficiently wide perspective, the short-run prospects of a given industry, however dire, seem less alarming than, say, the widespread belief that a particular, powerful dude can do no wrong, if you catch my drift. There are far worse, far more alarming problems in the world just now than the struggles of the nascent pot business.

Nevertheless, struggles abound, from Washington to Oakland, Seattle to San Diego. The legal-pot industry often gets compared to the dotcom era. But there weren't a lot of big layoffs during the flowering of that era in the mid- to late-'90s. Stocks like Netscape and Yahoo weren't sinking in 1998 as stocks like Tilray and Aurora Cannabis have done this year. Private, venture-backed companies generally weren't downsizing the way some, like Flow Kana, MedMen, Cannacraft and several others have done, with pretty sizable layoffs and in some cases shutdowns of whole divisions. New Cannabis Ventures' Global Cannabis Stock Index is down about 62 percent since its high point in March.

There's another big difference between the dotcom era and now: While both have been described as the "Wild West," only the tech industry of the '90s really deserves that designation. Cannabis is already one of the most heavily regulated and highly taxed industries in history, and it's hardly even gotten started. During the dotcom boom, there weren't even sales taxes on Internet retail purchases. And while the federal government today still considers cannabis to be as illegal as heroin and PCP, the federal government of the 1990s was doing all it could to AVOID regulating the Internet as it passed legislation, like the Communications Decency Act, that let online publishers go hog wild, free of consequence, ultimately creating the information nightmare we are now living.

And even where pot is legal, the heavy hand of government, however necessary it might or might not be, has created a ceiling up through which only the most stalwart legal-pot businesses can poke. Profit margins are generally slim, thanks to both taxes and tough regulations. The worst situation is in California, where the state Legislature refused to back off the 15 percent sales tax it slaps on retail cannabis products, or the separate, heavy tax it levies on growers. As a result, and combined with sometimes-high local taxes (as in Oakland until just last week, when the city council lowered rates), the underground market continues to thrive, while consumers who want to stay on this side of the law often find themselves paying an effective tax rate of more than 40 percent on already-expensive weed. Meanwhile, more than 80 percent of California's municipalities don't even allow cannabis businesses to operate, exacerbating the problem still further.

We learned in 2019 that crises can come from anywhere. Nobody at the beginning of the year could have predicted the widespread outbreak of severe lung disease, including some deaths, caused by vaping. The illnesses seem mostly traceable to poorly made, black-market cannabis vape cartridges. The fact that vape products purchased from licensed pot retailers are the SAFEST option, the message has nevertheless been "vaping bad," thanks to both clueless media outlets and mindless local and state governments, some of which banned all vaping products outright. Vaping companies were hit hard, as illustrated by PAX Labs, of San Francisco, laying off a quarter of its workforce in October.

But still, even some of the gloomiest gloomsayers are predicting that things will likely turn around, perhaps in the second half of 2020. California might lower taxes and ease some regulations. There is a move toward federal legalization, which seems inevitable in the next few years. Even if that doesn't happen in 2020, there's a good chance that Congress will at least pass the SAFE Banking Act, which would allow cannabis operators to use banking services just like any other business. Meanwhile, plenty of businesses are doing fine, and new ones are starting up. Just this month, Cookies Oakland opened on Broadway. The line on opening day stretched well down the block. 

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