Why legal weed is losing the war to illegal weed

The market for legal weed is growing. But, in California, as elsewhere, it faces serious challenges. We’re not talking about droughts, climate change or supply chain shortages. The biggest challenge is competition from illegal weed. Our best estimate is that roughly three-quarters of the weed currently sold to consumers in California is illegal, meaning it is not licensed by the state, and only one-quarter is legal.

When California voters passed Proposition 64 in 2016 to legalize recreational or “adult-use” cannabis, they also approved a complex state-run system for licensing, regulating and taxing it. This new system, which took effect in 2018 and replaced the formerly almost unregulated medical cannabis market, made legal weed much more expensive than illegal weed. Here’s how it works. Under Proposition 64, legal weed businesses must first obtain approval from local authorities, which is impossible in many parts of California. The lucky ones that do get such approval must then apply and pay for a state license. This two-step process can take years and consume hundreds of thousands, or even millions, of dollars in legal, consulting and license fees.

Legal weed businesses must also register with the state every gram of weed that’s grown, sold or transferred between locations through a complicated “trackand-trace” system. Managing this process alone can cost tens of thousands of dollars per month in software and labor costs. Of course, none of these costs is faced by producers or sellers of illegal weed.

Legal weed must be tested by an independent state-licensed lab for potency, and certified as being free from more than 100 different microbial “contaminants,” including more than 60 pesticides.

The list of rules goes on and on. For example, legal weed cannot be sold after 10 p.m. Perhaps this curfew was intended to ensure public safety, but, when the only weed available late at night — prime time for weed sales! — is illegal, that’s just a punishment for businesses that want to be legal, and it’s hard to imagine how having more illegal-drug dealers around late at night would make our streets safer.

Next come the taxes. In California, this begins with a state “cultivation tax” paid by the grower, which, in 2022, increased to about $161 per pound. The state “excise tax,” paid on top of the cultivation tax, is now 15% of the projected retail price. Then, there are additional taxes of up to 15% imposed at each stage from farm through retail by local municipalities. And there’s California’s standard 8% to 9% sales tax. All these taxes are paid by legal weed businesses and passed along to buyers of legal weed. None of them is paid by illegal weed businesses. Gov. Gavin Newsom is now proposing to eliminate the cultivation tax as a part of a cannabis tax simplification package.

Add up all these licensing costs, taxes and regulatory burdens, and we estimate that California consumers can end up paying twice as much for a package of legal weed as a comparable package of illegal weed.

But, not even the most experienced weed connoisseurs can tell, just from sampling the product, whether it came from a licensed or unlicensed seller. The only difference is in the packaging, labeling and testing certification, which are evidently not important to most consumers. Most won’t pay twice as much just to know its producer paid taxes and followed the rules.

The framers of Proposition 64 had noble ideals. They wanted to assure buyers that legal weed was perfectly safe to buy and use. They wanted to accommodate diverse interests among law enforcement associations, labor unions and environmental watchdogs. They wanted plenty of taxes and fees to fund such good causes as drug education programs, addiction treatment and research initiatives.

It’s nice to imagine a world where all weed businesses are registered, follow safety and environmental standards meticulously, and sell perfectly clean and pure products that generate lots of tax dollars for the state. But, trying to achieve those laudable goals perfectly is standing in the way of practical success for legal weed.

… In the long run, easing some of the many pressures on folks trying their best to follow the rules could help legal weed win.