California’s legal weed industry can’t compete with the illicit market

Infighting between industry groups and dysfunctional lobbying in Sacramento have blocked potential legislative solutions, with no clear end in sight. The magnitude of these problems means that California’s iconic cannabis industry – at least on the legal side – lags behind other states that have regulated the market.

“You don’t have a real cannabis industry if the dominant part of it has no interest in being legal,” said Adam Spiker, executive director of the Southern California Coalition, a cannabis trade association. “To my knowledge, no other regulated industry in the world does this. “

Licensed cannabis stores offering legal products are scattered across the state – there are about 2 per 100,000 people, one of the lowest rates in the country among states that support legal recreational sales.

By comparison, Oregon has 17.9 retail stores per 100,000 people. Colorado has a similar ratio, and Washington state’s rate is more than three times that of California.

California has only 823 licensed physical cannabis stores, but nearly 3,000 retailers and delivery services operate in the state without a license, a February 2020 market analysis by Marijuana Business Daily found.

The uncontrolled cannabis ecosystem has caused major economic and environmental damage in California. Many of the state’s roughly 50,000 illegal cultivation sites use banned pesticides that can poison wildlife and water supplies and are believed to be responsible for hundreds of millions of gallons of water stolen from neighboring farms and communities each year.

In recent months alone, law enforcement has shut down sprawling cultivation operations in the arid Antelope Valley and urban Alameda County, uncovering around 50 tonnes of processed cannabis products. and over 100,000 plants, worth well over $ 1 billion.

California Attorney General Rob Bonta announced earlier this week that the state had seized 165 weapons and more than 33 tons of infrastructure like water pipes and toxic chemicals after conducting nearly 500 raids this past year.

“The victims of the illegal cultivation of marijuana are numerous and the toll is heavy,” he said at a press conference. “Families whose water supplies are polluted with banned pesticides, an exploited workforce exposed to dangerous and illegal working conditions, farmers deprived of clean soil and water.

California, like many states, has reduced its penalties for illegal marijuana companies, in response to a disproportionate number of arrests targeting communities of color in connection with drug criminalization. Many in the industry say they generally support criminal justice reforms, but the current penalty for a misdemeanor and a $ 500 fine is simply too low to deter illicit activity.

Unauthorized dispensaries closed for city code violations often reappear, sometimes just down the street. And cultivation sites like the one raided in Antelope Valley often resume operations within days, concede law enforcement officials.

Every state establishing a legal market has faced illicit operations, but California’s underground market is much more entrenched. Many unlicensed businesses today have legally served customers for decades under state medical marijuana laws that were passed in 1996, but went underground after voters turned around. approved the recreational pot initiative Proposition 64 adopted in 2016. new regulatory fees and taxes.

The new law has forced longtime business owners to make tough decisions, said Elizabeth Ashford, vice president of communications for cannabis delivery company Eaze.

“They were fully authorized under the law just a few minutes ago,” she said, thinking back to when the new regulations were made. “Did anyone really think these people would just be like, ‘Okay, okay, we’re just going to close our doors’?”

California cannabis law allows local authorities to decide whether to open the door to cannabis or close it. So far, most opt ​​for the latter.

A whopping 68 percent of California cities ban the retail sale of cannabis, including large swathes of the Central Valley. Other areas have imposed strict caps on the number of licenses available, limiting market growth.

San Diego has only 25 pottery stores for a population of 1.4 million; San José has 16 stores for 1 million people.

Some local officials claim the industry harms children or claim that dispensaries attract crime. Others point to the difficulty of drafting orders, complying with strict environmental reviews and dealing with potential lawsuits from applicants who fail to obtain licenses.

Public meetings at places like Mountain View in Silicon Valley and Anaheim have turned into hour-long marathons filled with protests and name-calling when the topic of licensing cannabis stores is brought up.

Spiker, who helps craft local cannabis regulations, said some elected officials fear a pro-cannabis stance could cost them their seats.

“Just because prop. 64 was passed in a 60% community, say, the 40% who voted no will not organize a recall effort or a relentless attempt to get you removed from your post in your next election. ,” he said.

The shortage of retail stores – and legal storage space – gives unlicensed businesses a large unserved consumer base. It also contributes to an oversupply of state-produced goods 6,000 licensed growers which brought down the price of wholesale cannabis, hurting legal producers.

“Local control has, let’s be honest, crippled the California market and prevented it from reaching its potential,” said Hirsh Jain, founder of cannabis consultancy Ananda Strategy.

Industry executives say state lawmakers are unlikely will withdraw that power, in large part due to fierce support for local control from law enforcement and city and county officials.

Citizen initiatives and budget deficits linked to Covid have prompted some jurisdictions to open their arms to cannabis. According to Jain’s tally, 28 cities will open their first dispensaries in 2022 and 37 more will pass a retail ordinance.

Another problem for companies that do manage to get a license is competing with their unregulated competitors.

The price of cannabis products sold in legal dispensaries can be two to three times the price of almost identical items sold in unlicensed stores, which are not subject to increasing cultivation or excise taxes. costs to retailers.

Some buyers have little incentive to pay more for a legal product.

“Price is the biggest motivator for consumer choice,” Ashford said. “We know from our own data there’s no doubt that if you do things cheaper people will buy them. “

The difference between legal and illegal is not always obvious. Underground dispensaries are often indistinguishable from licensed stores and sell similar-looking items that may be counterfeit or diverted from the legal market. Illicit delivery services are also listed right next to legitimate operators on platforms like Google and Yelp.

Regulators warn products purchased from unlicensed retailers pose a risk to public health, indicating a rash of lung disease linked to untested vape cartridges that has killed 68 people and hospitalized more than 2,800 nationwide in 2019.

Lawmakers in pro-cannabis states have tried unsuccessfully to reduce the tax burden in in the face of opposition from SEIU, the powerful union that helped finance the 2016 election measure. The union does not agree with the industry’s argument that the reduction tax rates will drive growth and eventually increase tax revenues, said Robert Harris, a lobbyist for SEIU.

“I’ve never heard of an industry that hasn’t said, ‘Lower our taxes, we’ll sell more and you’ll earn more,’” he said.

Cannabis industry executives say finding a solution to the tax problem is their top priority for the next year. Nicole Elliott, director of the State Department of Cannabis Control, telegraphed that they could enlist the support of Governor Gavin Newsom, who has championed prop. 64 when he applied in 2016.

“I imagine the administration will be very happy to partner with the Legislature on these discussions,” she said.

But finding consensus on a tax front will be difficult. There is disagreement, for example, on whether a tax cut should be applied to culture or retail.

Lawmakers and Capitol Hill staff say this disunity makes legislative fixes nearly impossible to pass and perpetuates the status quo. This is a scenario that the industry cannot afford, given “the overhead costs the illegal guy doesn’t”, Spiker warned.

“The gap between the legal and the illegal is too big a gap to be bridged.”