The Dangers of California’s Thriving Black Market: Negative effects of cannabis policies
When California voters approved legalizing recreational marijuana in the state, it was believed that legalization would expand access to safe, legal cannabis products and cause a decline in the state’s well established marijuana black market.
We are now just a few years into California’s legal recreational cannabis market, and the black market for marijuana flower and derived products is showing no indication that it is going away. In fact, recent developments, including the announcement that cannabis taxes in California will be increasing come the beginning of 2020, have further empowered the state’s black market.
Considered by most metrics to be the largest cannabis market in the world, the California cannabis market has the potential to be the benchmark for cannabis policy in the U.S. and around the world, but it is struggling to gain traction. Are California’s marijuana policies hurting its legal cannabis industry?
California’s Legal Cannabis Misses Revenue Expectations
In its first few years, the California cannabis market has failed to reach the massive expectations put on it by analysts and industry insiders, many of whom anticipated incredible sales volume immediately out of the gate.
According to NPR, when California moved from its loosely regulated medical cannabis market to a recreational market, it lost half a billion dollars in legal sales, falling from $3 billion in 2017 to $2.5 billion in 2018.
As a result, the state has had to adjust its anticipated tax revenue as well. In January of this year, Governor Gavin Newsome’s budget expected $355 million in tax revenue in 2019 and $514 million in 2020. Then in May, Newsome adjusted projected tax revenue for 2019 and 2020 down to $288 million and $359 million respectively.
A myriad of reasons have been indicated for this unimpressive performance — including taxes that are too high and too few dispensaries opening to meet demand. With these complaints by consumers of legal cannabis being too expensive and too hard to get, many in California have turned or returned to the marijuana black market.
The total cannabis industry in California is valued at over $10 billion — more than two thirds of that, however, goes to the black market, suggesting that illegal marijuana sales in California are continuing to thrive after the state legalized recreational cannabis.
High Taxes and Fees on California Cannabis
As mentioned above, excessive taxes and fees attached to the cannabis industry are pushing up retail prices for cannabis products and driving consumers to the black market, where products are highly discounted.
Californians are paying as high as 45% in taxes on legal cannabis sales. Despite desperate calls by the cannabis industry in California to lower taxes, the state has chosen to do the opposite. California already boasts hefty taxes on recreational cannabis, and they are set to climb even higher at the start of the new year.
These high taxes are ultimately passed on to consumers, driving up prices in dispensaries across the state. In a statement, the California Cannabis Industry Association said that its members were “stunned and outraged”.
As cannabis products become more expensive, many consumers in the state turn to California’s well established marijuana black market for their products. This makes it more difficult for legal dispensaries trying to survive the already high taxes and fees demanded by state and local officials while being undercut on prices by the illegal marijuana market.
“Widening the price … gap between illicit and regulated products will further drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk,” the industry group said in the statement. As we will discuss below, unlicensed marijuana products may be responsible for health risks including the recent illegal vape scare.
California Assemblyman Rob Bonta urged the state to instead lower taxes, a move that he claims would encourage unlicensed cannabis businesses to migrate to the legal market. In the statement, Bonta said, “This short-sighted move ignores the realities that licensed businesses are at the breaking point, with many struggling to survive.”
Difficulties aren’t just limited to cannabis retail. Growers are also feeling the pinch. Legal cannabis cultivation businesses face restrictively high fees for licensing and permits.
According to one source, a medium size cannabis farm in California can owe close to $100,000 a year for application and licensing fees. Cultivators must also pay taxes on the cannabis they grow, further increasing overall cost per ounce.
These high fees and taxes push many growers to exist in the black market instead. California grows 11 million more pounds of cannabis than it can consume in a year. That means that the illegal market in California is saturated, and much of the state’s cannabis is headed out of state to supply the black market of states around the country.
With such a ready supply of cannabis being grown outside of the state’s legal system and limited access to legal marijuana dispensaries in large parts of the state, the marijuana black market in California is well positioned to meet consumer demand at significantly lower prices.
Limited Access to Legal Cannabis in California
California is also struggling with the issue of not having enough legal marijuana dispensaries to meet demand or provide access within a reasonable distance to many population centers.
The majority of municipalities in California (around 75 percent) banned the cannabis industry within their borders to some degree. In cities that did approve cannabis dispensaries, roll out has often been slow and the number of licensed shops open to customers is minimal in many regions.
This has further opened the door for unlicensed shops to do business in the state. Recent analysis of California’s cannabis market revealed that illegal shops outnumbered legal shops by 3 to 1. The report, released by the United Cannabis Business Association, counted a total of 2,835 illegal marijuana retailers in the state.
Lawmakers in Sacramento attempted to expand the reach of legal cannabis dispensaries in California by forcing municipalities whose voters approved of legal cannabis in the state to lift bans on dispensaries in their locations. As of May 2019, the bill, AB-1356, has been ordered to the inactive file. The bill, if passed, would have tripled the number of legal cannabis dispensaries in the state, according to estimates.
Risks of Black Market Marijuana
What is the harm of the existing black market for cannabis in California? Besides taking consumers away from legal businesses and reducing tax revenue earned by the state, the purchase of black market marijuana flower, vapes, and edibles poses significant risks for the health and safety of cannabis consumers.
Illicit marijuana products are not subject to the same restrictions as those sold in legal dispensaries. That means black market marijuana may be grown using dangerous pesticides or extracted using toxic solvents that, if not properly purged, may contaminate cannabis oil used in vapes or edibles.
The dangers of black market marijuana products were never clearer than with the recent health crisis linked to toxic cutting agents that were popularly used in the creation of black market THC vape pens.
Legal cannabis products purchased in licensed dispensaries are held to tight testing guidelines that help protect consumers from toxic contaminants linked to the improper use of pesticides, solvents, and cuttings agents.
The marijuana black market exists as unlicensed dispensaries — some of which are held over from the mostly unregulated medical marijuana market — as well as illegal “drug dealers” that come in all shapes and sizes from gang run operations to friendly purchases from people consumers know.
Because the marijuana black market in California is so varied and so well integrated into California culture, there is no easy solution to its eradication. However, making cannabis products in the state more accessible and affordable can help reduce the gap between legal and illegal sales.
California Cannabis Market Still Expected to Grow
Despite these challenges, the cannabis market in California is still anticipated to expand, attracting investors and entrepreneurs hoping to cash in on this growing market and giving hope to current businesses that are struggling to succeed.
According to the report, “From Dispensaries to Superstores: Opportunities in U.S. Cannabis Retail,” issued by BDS Analytics and ArcView Market Research, “While that market has faced initial difficulties as the industry and regulators dealt with the headaches of a new, untested regulatory scheme, rigorous new testing requirements, heavy compliance and tax burden and some slow-moving licensing jurisdictions, retailers in the state still managed to generate more than $2.5 billion in sales” in 2018.
The same market research firm anticipates that the legal California cannabis market will continue to grow to $7.2 billion in the next five years, with thousands of additional cannabis retail outlets opening across the state.
How well this growing legal cannabis market competes with the entrenched illegal market in California will largely depend on whether the policies adopted by state and municipal governments support affordable access to cannabis products.