The Economy of Cannabis in California: The Regulated Market vs. the Black Market

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Written By: J. Laura & Melissa Hutsell

 

Legal cannabis has brought billions of dollars in sales to state economies in the past few years alone — but the illicit market is still making more than its lawful counterpart. 

U.S. Senator Martin Heinrich of the Joint Economic Committee Democrats published a report in December 2018 which mentioned that the legalization of cannabis has had a significant impact on the U.S. economy both at the state and national level. 

Ever since the legalization of recreational cannabis in the 2010s in states including Colorado, Wasington and California, the industry had totaled more than $8 billion dollars just in 2017 alone, with another estimated $23 billion in sales by 2022, according to Heinrich. 

During that time, the cannabis industry had employed more than 120,000 people, while also having more than 9,000 active licensed cannabis businesses, Heinrich reported. 

And as more states fully legalize cannabis, those numbers will rise — generating a new stream of revenue and jobs at a local or national level, Heinrich said. 

Legalization however, has led to a competition between cannabis in the legal market and the black market. 

Joseph Detrano of Rutgers University mentioned that the illegal market still thrives in places like California despite the fact that cannabis has been legalized. 

Retrieved from: Medical Marijuana

It was reported by Detrano that California — which legalized the use of recreational cannabis in 2016 — had major illegal cannabis activities, such as the confiscation of cannabis farms worth more than 20 tons, and more than 100 illegal operations busted. 

In February 2019, Forbes reported that the newly elected Governor of California, Gavin Newsom, proposed moving 150 national guards to Northern California to help deal with illegal cannabis growers. 

The illicit market still thrives in California. In fact, research from New Frontier Data, a firm that tracks industry sales and trends, showed that 80% of cannabis sold throughout the Golden State comes from black market operators, as of 2018. The data also finds that California’s illegal market was valued at $3.7 billion in 2018 — four times the size of its legal market. 

In 2019, The Sacramento Bee reported a forecast from the BDS Analytics and Arcview Market Research that California will eventually earn $12.8 billion from the cannabis industry —  $8.7 billion from the illicit market, whilst only $3.2 billion for regulated ones.

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How is this so when cannabis itself is already legalized — in California at least? 

It is the cost of production. Forbes explained that the persistence of the black market is due to the high cost of compliance, which includes a “mix of high taxes and a limited number of legal dispensaries.”

For example, as of February 2019, California only had 634 license providers, the report cited. 

That has led to what many describe as cannabis retail deserts. As AnnaRae Grabstein, chief compliance officer of NorCal Cannabis Co. wrote in an LA Times Op-Ed, “[…] more than 17.5 million Californians live in a cannabis retail desert, where storefronts aren’t permitted.” 

As a result, Grabstein said, “consumers are forced to break the law to get their product. This is the direct consequence of local governments saying “not in my backyard” to legal marijuana sales.”

In terms of cost, California imposed a tax of 15% on all cannabis sales in addition to local tax — so if added, it is a 45% markup of taxes for production and distribution of cannabis, Forbes reported. 

Consequently, the cost is then passed onto the consumer — which means they are paying more for products at dispensaries than they would from a non-licensed dealer.  

Previously to adult-use legalization in 2016, Californians could already buy cannabis by either obtaining a medical cannabis card or purchasing it from the black market with little fear of arrest, as reported by William J. Meadows, of the Ohio State University, Moritz College of Law, Drug Enforcement and Policy Center. 

California has indeed a long history with cannabis since its legalization on medical cannabis in 1996, Meadow said. 

The report mentioned how on the first day of legal sales of recreational cannabis — on January 1st of 2018 — one customer, Jonathan Duenas said that he would not return to the store that sells legal cannabis because his friend sells it at a much lower price — though he had come for the novelty. 

Another reason consumers may want to buy from the black market is because it has no significant limitation on potency, and the amount a customer can buy at once. In a legal market, states limit the amount of cannabis one can buy. But not in a black market — so, users seeking to buy bulk will likely buy cannabis from an unregulated dealer over a regulated one, Meadows explained.  

So, what’s the solution?

The short answer that Meadows provides is, “reducing taxes, decreasing barriers to entry, and working with the black market.”

Of course, it is easier said than done. 

In June 2020, Merry Jane reported that recently, California is considering spending more tax to create a new cannabis police force instead of reducing tax or increasing the availability of legal cannabis.

Retrieved from: Tuluwat Examiner

The California Bureau of Cannabis Control (BCC) passed out a new budget request and is asking lawmakers to let it build an 87-member police force that would eliminate the cannabis black market and enforce the 2016 law of legalized recreational cannabis, The Sacramento Bee explained. 

The officers’ duties would investigate unlicensed and criminal cannabis activity, according to the budget requested submitted by the BCC, they further reported.

Meadows believes that subduing the illicit market could “improve public safety.” 

The American Public Health Association (APHA), for example, finds that “regulation of commercial marijuana can have positive effects on public health,” by curbing exposure to minors and establishing quality lab testing and potency standards.

As of now, it is clear that in California there is indeed a huge tension between the regulated and black market. And hopefully, the “war” will soon end. 

 

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Emerald contributor since July 2020
Journalist and contributor for Emerald; covering the social, cultural, political and medical side of cannabis and other (mostly sensitive) issues. For any collaborations or tips, email me at [laura@emeraldmg.com].

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