By Peter Fimrite

State taxes on legal marijuana sales in California are coming in far short of projections -- $34 million in the first quarter of 2018, about a third of the revenue that officials anticipated, according to data released Wednesday by the Legislative Analyst's Office.

Gov. Jerry Brown's January budget proposal predicted that $175 million would pour in from excise and cultivation taxes in the first six months of the state's newly created adult-use cannabis market. Those predictions were made even as officials acknowledged a slow start to the licensing of the new businesses.

Proposition 64 is supposed to transform the state's black market and loosey-goosey medical market into a multibillion-dollar legal industry, the largest in the nation.

Legal sales of recreational cannabis started with great hoopla on Jan. 1, but city and county officials across the state have been bickering over local retail and cultivation licensing protocols and limits on the number of outlets and growers.

"I'm not surprised at all," said Hezekiah Allen, the executive director of the California Growers Association, an advocacy group for more than 1,000 marijuana farmers, business owners and patients around the state. "Legalization done poorly has actually hurt the regulated market in California."

The Brown administration will release its updated tax figures on Friday, but the outlook isn't expected to get any better. Recent predictions had the recreational cannabis industry topping $5 billion in sales this year.

"Based on this quarterly tally, we think that 2017-18 revenue likely will be somewhat lower than the administration's January estimate," the Legislative Analysts Office wrote of the preliminary numbers released Tuesday.

The taxes include a 15 percent excise tax on purchases of all cannabis and cannabis products, including medicinal marijuana. The law also added a $9.25 tax for every ounce of bud grown and a $2.75-an-ounce tax on dried cannabis leaves. Local taxes vary, but they average about 8 percent.

The lackluster figures reflect just how difficult it is to set up such a large regulated market when an illegal one already exists. Some jurisdictions have banned marijuana cultivation and sales altogether and others have dragged their feet passing regulations, which are required before a state license can be issued.

The problem, Allen said, is that the transition to the regulated market has caused marijuana to become more expensive and the process of purchasing it less convenient than buying the illegal stuff.

"Consumers can't access the products they want," he said. "Most consumers in California probably have to drive 30 or 40 minutes compared to six months ago when they could have any product they wanted with the click of a button on an app. That market hasn't gone away."

The money from the taxes, the first installments of which were due April 30, is supposed to pay for marijuana research and regulation as well as programs to prevent drug abuse, protect the environment and test for pesticides.

Before January, medical dispensaries were required to pay state sales taxes that amounted to around $50 million annually, plus varying local taxes. Officials said only about a third of dispensaries paid all they owed -- a shortfall that became one of the arguments for legalization.

Allen said the complicated new rules have just made things more difficult, discouraging retailers from getting involved in the legal market. Only a few hundred of the estimated 12,500 retail operators in the state last year were able to become licensed, he said.

"We've been warning that this process was going to be different from what was predicted and this disappointing revenue report really confirms that this is going to be a long and difficult transition," Allen said. "The most important thing the state can do is reduce barriers to entry. If we want to increase revenue, we need to reduce barriers."

Allen said that right now marijuana buyers struggle to find one legal delivery service, but can easily find a dozen unlicensed ones.

"The state must take all possible action to defeat the black market and support good actors, or else our newly established regulatory scheme will surely fail," Assemblyman Evan Low, a Democrat from Campbell who heads the Business and Professions Committee, told the Associated Press.

State economist Seth Kerstein also told the AP that tax collections are expected to pick up significantly in coming months, but the $175 million midyear estimate appears out of reach.

Some legislators and lobbyists are pushing for at least a temporary cut in cannabis taxes out of fear that the high costs are pushing consumers into the black market.

(c)2018 San Francisco Chronicle