Washington's Cannabis Market Shrinks a Fourth Straight Year. The State's Answer: Raise the Tax.

Michael Dykstra farms against a clock. His Bellingham operation, Mount Baker Homegrown, is a small licensed grow without the preservation equipment the big producers run, which gives him roughly eight weeks to sell each harvest at quality — against as much as four months for the majors. "Cannabis truly degrades at least some fraction of a penny every second," he says. "You're losing money every second it's not being sold or consumed." Last December his revenue fell $150,000 before clawing partway back. Around him, the arithmetic is winning: neighbors with decade-old licenses — the legacy growers of one of America's two original legal markets — are going out of business, and growers who cleared $500,000 a year have watched it cut in half. (S2)

The numbers behind Dykstra's clock came into full view this month. Washington sold $1.14 billion of licensed cannabis in 2025, according to Department of Revenue data — the fourth consecutive annual decline from the 2021 peak of $1.47 billion, a 21 percent slide. The first quarter of 2026 came in below last year's, so the streak is intact. Washington voted for legalization in 2012 alongside Colorado and opened stores in 2014; a dozen years later, the market that helped invent legal cannabis is demonstrating what a mature one looks like when the policy around it stops fitting. (S1, S4, S5)

Start with supply. In 2017, Washington's growers produced 121,254 pounds of THC — nearly double what the state sold that year. By 2023, production had tripled to more than 363,000 pounds while sales had merely doubled. The state's own audit arm, JLARC, published a market study last July with a finding that would be comic if it weren't structural: regulators license growing canopy — 12.2 million square feet of it — rather than output, the seed-to-sale traceability system has been broken since 2017, its replacement is "incomplete and unreliable," and a working one is not expected until 2031. Washington cannot measure the oversupply it created. The producers can: their ranks have thinned 31.6 percent since 2017, with producer-processor attrition hitting 20 percent a year against 7 percent for retailers. (S3, S6)

"A lot of our colleagues are closing," said Jordan Zager, the plant scientist who co-founded Dewey Scientific in Pullman. "The volume of product moving from producer to retailer has severely declined, down 60% in just a year." In Benton County, producer and processor revenue fell 22 percent in 2025 to $8.2 million — roughly half its 2023 level — and of about 40 license holders, only 25 reported any revenue at all. (S3)

Then there is the tax. Washington's 37 percent excise is the highest cannabis rate in the nation, and layered under federal Section 280E it takes some operators' effective rate toward 70 percent, by Whitney Economics' reckoning. The state's own auditors and RAND estimate licensed retailers capture only 60 to 70 percent of what Washingtonians actually consume; the industry's economists put the legal share closer to half. "If the tax rate, as we believe, is pushing people into the untaxed illicit marketplace, then we've got to look at the tax rate as one of the barriers to a safer choice," said Aaron Pickus, spokesperson for the Washington CannaBusiness Association. (S2, S3, S6, S7)

Olympia has been listening — and reaching for the lever in the opposite direction. A citizen initiative to cut the excise from 37 percent to 7 percent failed to gather signatures by January. The proposals with actual legislative life would raise cannabis taxes: one bill adds a higher tier for high-THC products, and a separate revenue proposal analyzed by Whitney Economics would lift the base rate to 39.3 percent. Whitney's projection for that idea: legal demand falls 5.7 percent, and instead of raising the hoped-for $20 million, state revenue drops $9.5 million. "Solving a supply issue by changing tax policy does not appear, from our numbers, to be a viable solution," chief economist Beau Whitney concluded. His association counterpart, Vicki Christophersen, was blunter: "A regressive tax measure is not a viable solution. It does more harm than good." (S7, S10, S11)

“Cannabis truly degrades at least some fraction of a penny every second. You're losing money every second it's not being sold or consumed.”

— Michael Dykstra, Owner, Mount Baker Homegrown, Bellingham

The federal relief lifting other markets will mostly skip Washington. Because the state licenses a single recreational market with no separate medical tier, the Liquor and Cannabis Board's June analysis concluded April's Schedule III rescheduling of medical cannabis "does not appear to apply" to its licensees — leaving them under 280E while medical-heavy operators in Florida and Pennsylvania book the tax savings. The board allowed its reading "may not be our final interpretation." For now, the pioneer state is watching the industry's biggest financial reform from the wrong side of its own statute. (S8)

There are gentler readings of the data, and they deserve the hearing. The 2021 peak was a pandemic artifact — 2025's total still exceeds 2019's — and the state framed the first decline, back in 2022, as a return to normal. Analysts at Headset have long attributed most of the slide to price compression rather than vanishing customers: in a mature market, falling prices shrink dollar sales even when volumes hold. Some of the decline is migration, not loss — Whitney's data shows buyers shifting from taxed adult-use purchases to tax-free medical ones. And Washington is not the worst-off pioneer: Colorado has fallen roughly 41 percent from its own 2021 peak, nearly double Washington's drop. Benton County even posted a modest first-quarter uptick this year. Shrinking, in other words, is what winning looks like among legacy markets. (S3, S4, S9, S12, S13)

What makes the standoff self-perpetuating is that every actor is responding rationally to a system nobody would design on purpose. Growers overproduce because canopy is licensed and output is not, and because exiting means abandoning a sunk-cost license that can't be replaced — the state stopped accepting new applications years ago, except through a Social Equity window that is now adding 10 producer-processor and 52 retail licenses into the oversupply. Retailers under-order because wholesale prices keep falling and fresher product is always coming. Consumers arbitrage: toward the illicit market, toward tax-free medical purchases, toward the hemp-derived products that filled gas stations until the state and then Congress moved to close that channel. And the Legislature, facing its own deficit, sees the one sin industry it can still tax harder. Each rational choice deepens the hole. (S2, S3, S6, S7)

1. The 2026 legislative session's endgame — whether the high-THC tax tier or the 39.3% base-rate proposal passes, against Whitney's warning that both shrink revenue.
2. The LCB's rescheduling interpretation — it flagged its 280E reading 'may not be our final interpretation'; a reversal would be the biggest financial event in the state's market in years.
3. 2031 — the target date for a working traceability system, without which the state will keep regulating an oversupply it cannot see.
4. The Social Equity licensing window — 10 producer-processor and 52 retail licenses being issued into a market already producing two to three times what it sells.

Dykstra's eight-week clock keeps running either way. The growers who survive Washington's correction will be the ones who can wait out a legislature, a broken traceability system, and a tax code that treats their product as a windfall — all while it loses a fraction of a penny, every second, on the shelf.

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