In November, 2016, voters in California overwhelmingly approved Proposition 64, legalizing recreational cannabis across the state. California joins eight other states and the District of Columbia in passing recreational marijuana legalization initiatives, and the recreational market has been booming ever since. The law went into effect on January 1, 2018.
Now, four months after the law made recreational cannabis officially legal, how is the state’s market handling it? The answer to that question varies, from questions about policies to surging profits and confusion about the licensing process. In general, though, the state is experiencing substantial growing pains, and many steps will be needed to be undertaken before the market truly stabilizes. In this article, we will discuss some of the problems facing California’s recreational cannabis producers and retailers, not to mention consumers, and provide insights into the work being done to erase an uncertain future for the cannabis market.
Problems for California’s Recreational Market
At a California Cannabis Industry Association conference held in Sacramento earlier in 2018, cannabis business owners aired their many grievances, decrying real and perceived problems by the dozen. Some of the problems facing the nascent recreational market in California include:
- Too few retail sales locations to get product to customers
- Licensing agencies falling behind on approving new recreational licenses
- Distributors that are not following the rules and statutes, undercutting those that comply fully with existing laws
- Not enough laboratory analysis/assay capacity for quality assurance purposes
- Supply chain deficiencies, including insufficient product to keep retail shelves stocked
Part of the overall problem stems from California’s prohibitively high licensing and taxation rates. High license fees are tending to keep legitimate business interests from becoming established, slowing down the process of opening retail locations. High tax rates on the sale of marijuana products has encouraged a resurgence in black-market sales, as products are substantially cheaper for consumers than would be found in the licensed retail outlets. Lawmakers in the state have banded together to co-sponsor a bill temporarily lowering the tax rate to put an end to black market cannabis sales and to spur legitimate retail sales.
Another problem, or series of problems, arises from the regulatory agencies tasked with setting regulations for licensed operators to follow. Despite a year or more of preparation, the California Bureau of Cannabis Control and the state departments of public health and of food and agriculture have not released their final regulations. In fact, those regulations are not expected to be implemented until the end of 2018. In the meantime, lawmakers have proposed a large number of tweaks to the existing statutes, creating an atmosphere of chaos and confusion.
Local Barriers to Entry
Local government initiatives have further clouded the prospects of the legal cannabis industry. Although the recreational legalization initiative is statewide, provisions in that law allow for local jurisdictions to set their own regulatory requirements. Some municipalities have forbidden cannabis operators from doing business in those cities. Others have placed prohibitively high licensing and business registration fees on cannabis entrepreneurs, causing many to simply give up before undertaking the expensive process of getting registered.
Like the high retail sales tax rate and state licensing fees, local governments setting high costs of entry to the market has only served to create a flourishing black market throughout California. This is especially ironic, since the reasoning behind establishing recreational cannabis legislation was to eliminate black market operators by creating a strong and profitable legal market. It is clear that those good intentions have backfired. As of the end of March, 2018, there are just over 4600 temporary licenses granted for cannabis operators in the entire state; this paltry number is in stark contrast to the estimated tens of thousands of gray- or black-market operators without licenses.
One of the largest concerns for the legal marijuana industry in California is that less than a third of all municipalities in the state have adopted some form of legal authorization for cannabis businesses, including both medical and recreational operations. This effectively shuts out 2/3 of the state in finding locations to begin doing business. Without local approval, there is no path forward for a state license to be granted to cannabis businesses, stifling the market even before it has had a chance to establish roots. Local governments have few incentives to streamline the process; as mentioned earlier, the state regulations gave substantial leeway to local municipalities to create their own regulations or to forbid cannabis business operations. There is no specified timeframe, and many entrepreneurs and industry analysts accuse those local governments of creating unnecessary delays for no real reason.
Supply-Chain Issues Affecting California’s Cannabis Market
Two other problems are facing California’s recreational cannabis market, and both have to do with supply-chain concerns. First, California’s regulations specify that retail sales locations will be required to sell only those products that have met testing standards set by the state. That stipulation goes into effect in July, 2018. The problem here is that laboratories are not yet set up in sufficient numbers to handle the required testing. In fact, only about 20 labs have obtained the necessary licenses from California authorities. This is wholly insufficient to handle the testing needs for thousands of cannabis operations, and is expected to create a product shortfall across the entire market unless lab licensing rapidly expands.
Distribution is another huge concern, with less than a hundred large-scale distribution operations servicing cannabis businesses in California. This weak supply-chain system will only struggle in the coming months; industry analysts point out that many distributors are not charging the required excise tax to buyers (at a 15% tax rate), misguidedly believing it is the retailer’s responsibility to collect the tax. When distributors are served with exorbitantly high tax bills due to their error, it will cause many distributors to pull out of California operations. California is racing to establish a comprehensive supply-chain tracking and tracing system, which, once operational, will shine a spotlight onto distributor practices falling outside of accepted norms. If distribution is curtailed, this could potentially compound product stock problems faced by retailers.
It is clear that much needs to be done to ensure California’s cannabis industry can do business. With the necessary tax and regulation reform, the largest cannabis market in the United States can once again move to profitability as retail sales expand statewide. Time will tell whether lawmakers and regulatory officials are up to the task of protecting this lucrative retail market in time for it to flourish rather than fail.
The fast-growing legal cannabis industry is attracting interest from many other market sectors in recent years. In addition to capital investments from the tech sector, the wine industry has become especially prominent in the cannabis market, looking to unlock new revenue streams by partnering with cannabis firms in the United States and Canada. Of particular note is interest in the recreational cannabis sector, which is poised for significant growth in the coming years.
Wine Industry Interest
Once seen as the “enemy” of the cannabis industry due to fierce competition for customers, alcohol producers have expressed a deep desire to join forces with cannabis producers and retailers. For marijuana businesses, wine companies represent a number of unique business opportunities, including that of added legitimacy. It is not only the winemakers themselves that have begun to pursue entry into the cannabis market, but a wide range of wine-centric business operations and professional staff, including:
- Compliance specialists
- Packaging and labeling concerns
- Marketing firms
- Legal professionals
- Finance specialists
On its surface, this potential partnership between marijuana and wine companies seems unusual, but it begins to make sense when one realizes that the two markets are very similar in many ways, especially in legal compliance, marketing, and financing. For members of the wine industry, entrance into the marijuana market is a logical step and an easy transition for those firms that recognize the similarities in operations and in customer base.
Spurring Partnerships Between Wine and Cannabis
The interest coming in from wine-centric businesses is a relatively new phenomenon. In 2016, a discussion session at that year’s Wine Industry Network expo featured the topic of marijuana legalization and how that might affect wine sales. Analysts noted that the session was overwhelmingly popular with event attendees, and encouraged the Network to carry on the conversation in another one-day conference.
In August, 2107, the Wine Industry Network hosted a symposium in Santa Rosa, California. It brought together experts from the wine and marijuana industries and covered topics like regulatory compliance, tourism, cultivation, licensing, and many other aspects that the two business sectors shared. Like the session at the 2016 industry conference, the 2017 symposium was met with enthusiasm by business owners, industry personnel, and ancillary operations, packing the meeting rooms of the event.
Industry analysts from both sectors agreed that cannabis has become more palatable to established wine and spirits firms due to the fact that a promised threat by the federal government to crack down on legal cannabis businesses has not yet caused issues. On the state level, marijuana has gained legality; 29 states and the District of Columbia have legislated legal medical marijuana, while nine states and D.C. have also passed recreational cannabis legalization laws.
Technology and Operations Outreach to the Cannabis Industry
As mentioned earlier, both the wine and cannabis industries share many similarities. Both must adhere to strict regulatory compliance. Both depend on the successful cultivation and harvest of living plant material to manufacture their end products. And, both have a particular focus on hygiene and contamination control in their cultivation and production operations. Because of these similarities, there is significant overlap in many aspects of operations, with technology and packaging/labeling operations representing the potential for unique partnerships between industries.
Companies that manufacture contamination control solutions have found that the same technology can be applied to cannabis production facilities. An ozone-generation system that was developed for the wine, food, and pharmaceuticals sectors has found a home in cannabis production, particularly in companies that produce edibles and oral tinctures, two segments of the marijuana industry that are highly-regulated in terms of food safety standards. Cleanliness and cross-contamination protection technologies developed for agricultural concerns are also a ready match for cannabis cultivation; with much of commercial cannabis produced in indoor grow facilities, the spread of pathogens or molds can wipe out entire harvests. Cannabis operations depend on clean, healthy facilities to ensure success, and they have adopted technologies with the help of companies that had served the wine industry for decades.
In packaging and labeling operations, overlap between the wine industry and the nascent marijuana market presents new opportunities. A study conducted by the wine industry suggested that up to 70% of all wine purchases were influenced by the design and appearance of bottle labeling. Wine labeling specialists know that labels give companies the opportunity to educated consumers on the specific characteristics of the wine and its crafting. This is also the case in the cannabis industry, where there may be hundreds of different marijuana strains and cannabis-infused products to choose from. Marijuana markets looking to differentiate themselves from competitors know that visual marketing in the form of stylish and informative labels can spell the difference between failure and success.
Wine labeling operations must also adhere to established standards, and the same factors apply in several cannabis-legal states, where all labeling must contain specific information for consumers. Marijuana producers and retailers see wine labeling as a path forward, applying the lessons learned by the wine industry over decades and ushering in new partnerships between that industry and the cannabis market.
Wine vs. Cannabis: Friend or Foe?
Not all wine business players are sharing excitement about potential partnerships with cannabis producers. While many wine industry veterans see the cannabis industry as an allied market ready for exploration and partnership, others approach the cannabis industry with trepidation. Federal regulations and the specter of federal crackdowns have had a chilling effect on some partnerships.
Distrust among cannabis businesses is the most prominent factor influencing partnerships between industries. Due to the sensitive nature of cannabis production and the strict regulations surrounding its cultivation, retail, and distribution, many marijuana firms are reluctant to trust outsiders. Once they have learned more about wine industry operations, however, trust is built and both sectors can enter into lucrative partnerships. Industry analysts note that the similarities between markets are just too sweet to ignore. If both sectors understand that by forging partnerships, the combined forces can expect new revenue streams and a more engaged customer base.
Legislators in New York seem to think so. Recently, Democrat Amy Paulin introduced legislation that would allow veterinarian in New York to certify pets for the medical cannabis program. However, Paulin has not found a sponsor in the Senate.
What Does the Legislation Say?
The argument for the legalization of medical marijuana for pets is simple: Since many people benefit from medical marijuana, animals with similar medical conditions can also benefit.
The bill states, “Research suggests that animals can also benefit from cannabis use to similarly treat their ailments.”
For pets with chronic illnesses or those who traditional treatment methods have not been effective, animal owners would be given the option to use medical marijuana to bring relief to their suffering pet.
Will the Legislation Make it to the Floor?
Unfortunately, no. With no co-sponsor in the Assembly and no sponsor in the Senate, the bill faces an uphill battle. In addition, Governor Andrew Cuomo is not rushing to support any medical cannabis legislation. So, even if the bill were to pass both the Assembly and Senate, it may end up “dead-on-arrival” when it reaches the governor’s desk.
There is some good news for the bill’s supporters. Representative Richard Gottfried, a longtime proponent of medical cannabis and chair of the Assembly Health Committee, received the bill. Gottfried was the lead sponsor for legislation in 2014 for New York’s medical cannabis program.
Growing support across the country is building for the use of medical marijuana for people suffering from a wide variety of ailments who are seeking relief. Research continues to prove the benefits of cannabis oil in treating a variety of conditions.
Veterinarians and pet owners, in states such as Nevada, where medical cannabis for pets is allowed, are finding that there are many positive benefits for dogs. When used as an alternative medication to treat cancer, seizures, or even anxiety, cannabis oil is gaining popularity.
What is Cannabis Oil?
Derived from the marijuana plant, cannabis oil is extracted from the flowers of the plant. Marijuana flowers contain trichomes. These are glands on the plant that contain essential oils. When separated from the plant, scientists formulate these oils to identify the perfect ratio of cannabinoids.
Cannabinoid is a class of chemical compounds that act on certain receptors and alter the release of neurotransmitters in the brain. There are two main constituents in the marijuana plant: tetrahydrocannabinol (THC) and cannabidiol (CBD).
THC is the psychoactive compound that gives users the “high” feeling and CBD does not. However, CBD has been found to provide anti-anxiety and anti-psychotic effects for users.
Scientists have isolated 113 different cannabinoids from cannabis which exhibit varied effects. Epilepsy, inflammatory conditions, multiple sclerosis pain, and even certain addictions have been treated successfully with CBD.
For pet owners who are worried that Fido will become addicted to marijuana, Dr. Gary Richter, an Oakland, California veterinary medical director, states, “Depending on the nature of the product, if it contains little or no THC, then the dog is not going to get high.”
What Are Some of the Benefits for Dogs Who Take Cannabis Oil?
When the cannabinoids in marijuana connect with the endocannabinoid system, relief for pain, anxiety, or even nausea is felt. A series of receptors runs throughout the body. The cannabinoids interact with these receptors bringing many dogs relief. In addition, with proper dosage, there are no life-threatening side effects, unlike some other traditional medications that are prescribed by doctors. The kidneys, liver, or GI tract are not damaged by cannabis oil.
Some common health conditions in dogs that cannabis oil has been found beneficial in treating include:
- Back Pain
- Gastrointestinal issues
- Cancer symptoms
What Are Some of the Potential Risks for Dogs Who Take Cannabis Oil?
Since a minute amount of THC is in cannabis, not enough for the pet to get “high,” but enough to be detected, if a pet receives an overdose of cannabis oil, the effects may last for days. THC toxicity can be a very noticeable side-effect of an overdose of cannabis oil. The pet may be unable to stand or eat.
However, these types of life-threatening risks are very rare. In fact, a pet is more likely to have an adverse reaction to chocolate, coffee, or raisins. Still, there have been recorded cases of dogs who have ingested large amounts of marijuana and died. Therefore, Dr. Jennifer Coates, a veterinary advisor with petMD advises that preventing overdoses with medical cannabis is still extremely important. As with any medication given to a pet, consult a veterinarian first.
How Do I Administer Cannabis Oil to My Dog?
There are some topical treatments available, but typically, cannabis oil is administered to dogs orally. Cannabis oil does not interfere with other traditional medications and treatments. In fact, research suggests that marijuana and traditional medications share “synergistic benefits.”
Dosing should be done properly to prevent any negative side-effects such as psychoactive reactions. If a pet is dosed properly, they should only have a positive effect and no psychoactive effects.
However, there is a problem with dosage regulations for dogs…there are none. Coates suggests that until there is sufficient research done to determine the correct dosage for CBD oil in dogs, pet parents should take the time to talk to a veterinarian who is already experienced with treating pets with cannabis oil. Information about proper dosage and reputable manufactures is akin to gold.
Where Can I Get Cannabis Oil for My Dog?
Depending on which state a person lives in and the state’s marijuana laws, obtaining medical cannabis for a pet may be as easy as pulling out a person’s medical cannabis card. Since there are no medical cannabis cards for animals, a person must first speak to a veterinarian who is familiar with proper dosage amounts. Then, they can purchase cannabis oil with their personal medical marijuana card and administer the proper dosage to their pet. Pet parents who live in states where there are no medical marijuana laws may opt for hemp products that contain lower amounts of THC.
It is obvious that much additional research needs to be conducted on proper dosage amounts, the numerous benefits to cannabis oil for pets, and any side effects that may yet be known.
For many years, natural healers and many in the medical community have understood the power of cannabis in helping to treat chronic pain. Active compounds in cannabis, particularly cannabidiol, or CBD, have been shown anecdotally and in scientific studies to bring about pain relief in test subjects. While research is still needed to determine dosing accuracy and frequency, advances in our understanding of CBD oils derived from cannabis have been achieved. Of note is a recent study conducted by the Cornell University College of Veterinary Medicine, which investigated a hemp oil product made for dogs suffering from chronic pain conditions. In this article, we will discuss the study as well as the background on hemp oil in treating a number of health conditions.
What is Cannabidiol?
Before discussing the CBD oil study conducted by Cornell University, it can be beneficial to introduce cannabidiol, one of numerous active chemical compounds found in cannabis. In medical marijuana production and use, CBD and a similar compound called tetrahydrocannabinol, or THC, are the focus of research. These two compounds are classed as cannabinoids, of which there are hundreds of examples. THC is the chemical compound that produces feelings of euphoria. In other words, THC is psychoactive, producing the “high” that recreational marijuana users desire.
CBD, on other hand, is not a psychoactive cannabinoid. Medical patients who rely on cannabis for relief may not want the side effects that THC brings to the table; for those with chronic pain, the debilitating high can get in the way of function and daily activity. Cannabis strains with high percentages in CBD were developed to provide these patients the relief they need without the disordered thinking and euphoria that is associated with THC. CBD oil derived from these strains boasts little, if any, of the psychoactive THC compound. Some states that have not legalized medical marijuana use, sale, and possession still allow CBD oil to be sold in the state, provided that THC levels are non-existent in those oil products.
The Cornell University Study
In a partnership with ElleVet Sciences, the College of Veterinary Medicine at Cornell University conducted a research study centered on a hemp oil product manufactured by ElleVet. The goal of the study was to determine the effectiveness of ElleVet’s Mobility soft chews in controlling pain and soreness in dogs. The study took place over an eight-month period and was designed as a placebo-controlled and double blind investigation – the first of its kind in the veterinary sciences. In addition to investigating the pain relief potential of the product, another component of the study was to determine dosage scheduling and dosage rate. Investigating how the product was metabolized and its exact chemical effect was also part of the research study.
ElleVet’s Mobility soft chews contain CBD derived from hemp oil as well as two other compounds, chondroitin and glucosamine, known to provide improvements in joint mobility in animals and humans. In the study, over 80% of dogs who used the soft chews experienced substantial reductions in pain, resulting in improved mobility. This was especially true for dogs suffering from osteoarthritis, chronic joint pain, geriatric pain and discomfort, and the loss of mobility resulting from age. Geriatric dogs in the study showed the most dramatic improvements in functional mobility. Researchers involved in the study endorsed the product, describing it as a “game changer” for the veterinary medical community. Further studies need to be conducted, but the partnership between ElleVet and Cornell University is already lining up new investigations. First, the group will research the effectiveness of the Mobility soft chews on mitigating surgical and oncological pain in dogs. Next, ElleVet’s hemp oil product developed for cats will also be investigated in a similar study to the original dog-oriented one.
CBD Oil in Scientific Studies
Cannabinoids have been studied by health researchers for many years. CBD, the active cannabinoid credited with pain relief, has been the focus of nearly 25,000 published studies. CBD oil is credited with many health benefits borne out by exhaustive research. Among these health benefits are:
- Anti-anxiety properties
- Chronic pain relief
- Anti-inflammatory action
- Reduction in seizure frequency in epileptic patients
For the commercial cannabis cultivator, high-CBD strains represent a unique opportunity to bring science-backed health benefits to the medical marijuana community. Edibles and concentrates produced from these strains are proving popular with medical cannabis patients and have found acceptance even in states where a stigma on cannabis consumption is still in existence. Eliminating the psychoactive high from the equation has been a game-changer for many in the medical cannabis production industry, allowing their products to be sold in states that have not yet legislated medical marijuana use and possession. The future is bright for the medical cannabis community, thanks to groundbreaking studies like the Cornell University investigation in treating patients struggling with chronic pain.
Beating the Cannabis Black Market
For decades, black market cultivators and sellers serviced the huge cannabis-using population in the United States. Recent passage of legalization initiatives in a number of states, on both recreational and medical fronts, was designed to finally curtail illicit sales and distribution of cannabis products. Still, black-market sellers are an ever-present threat to the legal cannabis market, and many entrepreneurs are taking steps to fight back. In this article, we will discuss best practices for outsmarting the cannabis black market, helping legal companies to encourage their consumers to support the growth of a legitimate and thriving cannabis market.
A Regulatory and Taxation Quagmire
As of April 2018, 29 U.S. states and the District of Columbia have passed some level of medical marijuana legislation, legalizing the cultivation, distribution, possession, and sale of cannabis or cannabis-infused products. Nine states and D.C. have also passed recreational marijuana legalization initiatives. Together, the legal cannabis industry represents billions of dollars in retail revenues and taxes – in fact, industry analysts suggest the retail side alone may be worth as much as $40 billion by the year 2020.
Despite these glowing figures, all is not well with the legal marijuana industry. To a large extent, legitimate cultivators and distributors are still battling against black market operators. Why hasn’t legalization legislation stamped out the illicit production and sale of cannabis products? The problem is two-fold, and centers on taxes and regulation of the industry.
Taxes on retail marijuana sales can be extremely steep, exceeding 15% or more in some states. For example of the restrictive taxes imposed on retail cannabis sales, California charges sales tax and an excise tax on retail sales of marijuana products. Taxes on producers and distributors further drive prices up. These taxes have tended to make legal products prohibitively expensive, forcing many consumers to source their products on the illicit market. To counteract this trend, lawmakers in California and in other states are considering bills that may temporarily lower taxes in an effort to spur the legal part of the industry while curtailing the cost advantages the black market represents to customers.
Licensing is another area where the black market gains an advantage. The licensing process for legitimate cannabis businesses is complex and expensive; high fees and a potentially long waiting period before license issuance means that many would-be marijuana entrepreneurs give up before completing the process. In the meantime, unlicensed cultivators and operators are flooding the market with cheap cannabis. Avoiding licensure and operating under the radar gives them significant advantages, allowing them to offer their products more cheaply to budget-minded consumers who don’t mind the risk.
Tips for Cannabis Entrepreneurs
Faced with challenges in combatting black-market production and sales of cannabis products, what can legitimate marijuana entrepreneurs do to turn the tide? Business advisors and cannabis industry analysts have put much thought into strategies that reward consumers while taking away some of the advantages that black market operators have in the current industry atmosphere. In simple terms, these strategies:
- Build brand and business loyalty
- Help entrepreneurs gain customers and retain those customers
- Encourage lawmakers to reform existing taxation and licensing issues
Here are some of the techniques savvy cannabis entrepreneurs are using to advance the legal market:
Loyalty Programs – in any business, rewards or loyalty programs encourage repeat customers, providing incentives on prices or special deals. In the legal cannabis industry, enterprising retailers have instituted similar loyalty programs. There are several types of programs, including those that offer points for each purchase, discounts for signing up for newsletters and updates, or point-of-sale perks. Signups for news and updates seems to be one of the most popular programs; these programs offer instant discounts or discounts to be used in future purchases. And, this allows the dispensary or retail outlet to share information with their customers, which ultimately impacts sales in a positive way. Communication with customers is key in building brand loyalty.
Humanitarian Support – in a crowded marketplace, retailers often look for ways to differentiate themselves from one another. In the legal weed industry, a large number of operations work to support humanitarian causes such as food banks, medicine for underserved populations, and clean water initiatives. This type of support appeals to conscientious consumers – those who make purchasing decisions with their hearts as well as with their wallets. Delivering social good creates an atmosphere of goodwill, and customers across market sectors tend to support companies that give back to the communities around them.
Education and Customer Outreach – as mentioned earlier, communication with customers helps to build brand loyalty. One way that cannabis entrepreneurs further the communication is by providing information and education to customers at the point of sale and on packaging/labeling. Certain states, such as California, require cannabis products to be laboratory tested. Even in states where this is not a requirement, having products assayed by a certified lab can mean the difference between increased sales and lackluster retail performance. Educating patients and recreational customers on the safety standards, lab testing processes, and concentrations of active ingredients in the cannabis products goes a long way toward building brand awareness, differentiating those that educate from others that simply sell products. This kind of education is simply unavailable on the black market, creating a significant advantage for legal operators. Of particular note is the market segment containing infused products and extracts; black-market operators have no incentive to adhere to safe practices, and their products may contain harmful chemical residues. Legitimate extracts producers, however, can demonstrate to their customers that their products are free from contaminants and are made under industry best practices.
Originality – in any market, brands that are perceived as original stand out from their competitors. This is just as true in the regulated cannabis market. Cultivators, distributors, and retailers can showcase their originality by developing products and strains that meet certain criteria, such as potency or concentration of CBD, an active compound shown to provide significant health effects without the debilitating “high” of recreational marijuana products. Strains that are produced regionally can be “curated” much like fine wines, lending a sophisticated air to the retail environment. And, innovative products, such as extracts, vaping cartridges, and flavorful edibles provide plenty of opportunities for smart cannabis retailers to be original. Black-market operators can’t or won’t match the dizzying array of products and strains, putting the ball directly into the court of legitimate cannabis businesses.
The black market sales and cultivation of cannabis will continue well into the foreseeable future. However, with some regulatory reform and creative thinking on the part of legal cannabis businesses, the black market influence will lessen over time, opening new doors of opportunity for the regulated players in the legitimate and booming commercial cannabis industry.
In an effort to keep buyers away from the black market, one California city has lowered its sales tax on recreational cannabis.
Berkeley, California, has lowered its sales tax on recreational cannabis. Economics 101 students know that supply and demand dictate any market. However, with California’s heavy tax program on marijuana dispensaries, these businesses are not able to compete with the low prices offered on the black market.
More evidence is proving that legalization of marijuana disrupts and breaks down the black market. It decreases the number of illegal drugs smuggled across the border and nearly eliminates the likelihood of violence when purchasing cannabis. When excessive taxes are placed on legal items, such as marijuana, historically, the need for lower priced items are filled by the black market.
Tax Cuts in Berkeley
The city of Berkeley cut their city-level tax on recreational marijuana from 10 percent to 5 percent in an effort to bring down the total cost of marijuana in their city. When state taxes are factored in, the total amount of tax paid, before the cut was 35 percent. With the new tax cut, it will drop the tax amount to 30 percent.
Although this still seems exorbitant, Berkeley’s new tax level on marijuana is actually one of the lowest in the country. In some places in California, the tax on marijuana is a staggering 45 percent. California law mandates that taxes on cannabis include city tax, sales tax, cultivation tax, and state excise tax. This makes it difficult for reputable dispensaries to compete with the black market.
As with any new commodity, legal cannabis sales boomed in California after recreational marijuana was legalized. However, dwindling legal cannabis sales are dwindling in California after only a few months of legalization. Now that the initial excitement has worn off, consumers are looking for lower prices and finding them on the black market.
A marijuana shopper told CBS he believes that taxes are driving people away from legal marijuana. “The taxes, I think, are what’s driving people not to come to the club anymore,” he stated, “I know a lot of my friends who used to come to the clubs are going back to the black market.”
Illegal marijuana can be found online for $20 less than what is found at local dispensaries. Until California drops the taxes on legal marijuana, the black market will continue to boom. In fact, higher taxes may mean less revenue for the state.
For example, Colorado’s marijuana sales yield a billion dollars in tax revenue for the state. Most tax rates average around 15 percent in Colorado, with some even higher. In turn, Colorado is able to collect funds for education and other social endeavors. California had hoped that raising its tax rate to 35 percent, the state would be able to collect the revenue it so desperately needs. However, this plan backfired as consumers are going back to the black market leaving California with even less revenue that Colorado.
Berkeley Patients Group worker, Sabrina Fendrick explains, “Everybody wants to generate revenue, we all want to serve our communities, but if everyone is going to the illicit market, then nobody is generating revenue, and nobody is being helped.”
Too Much of a Good Thing
Can there really be too much marijuana grown in California? Another basic economic principal is that too much of a product in a market will drive prices down. California’s cannabis production is estimated to be eight times more than what is currently consumed in the state. This leaves literally “tons” of extra marijuana.
California produces between 14 to 16 million tons of marijuana. In turn, Californian’s only consume around 2 million tons. This leaves well over 12 million tons of marijuana on the market. In addition, this excess cannabis cannot be exported to other states under federal law and the new California state regulations which went into effect in January.
Hezekiah Allen, executive director of the California Growers’ Association said, “In the past, when a product left the farm, there’s a really good chance the grower had no idea where it was going. But in the future, every single license holder is going to need to know exactly where every gram of product is ending up and so conditions are going to change very quickly.”
It seems he was correct. In addition to the surplus marijuana flooding the market, the higher price, due to extreme taxation, leaves Californian’s turning to the black market in waves.
In addition to buying on the black market, many growers are growing their products without state approval. California enforces strict pesticide regulations on growers. Since many farmers can’t afford or don’t qualify for a permit stating that they follow the state’s strict environmental regulations, they sell their products on the black market instead of at dispensaries. This floods the market with lower priced marijuana.
Legislators Finally Listen
Berkeley’s cut on city taxes for marijuana is just one measure officials in California are taking to combat high pricing. Currently, state officials are working on developing legislation that would help to lower the excise tax by 4 percent statewide. However, it is clear that additional cuts need to be made.
As long as there is demand for lower priced cannabis, and growers are willing to fill that demand, the state of California will be left with two choices. One, be willing to accept lower revenue in lieu of higher taxes and tight regulations on growers; or two, lower taxes, lighten up on growing regulations and allow growers and dispensaries the ability to compete with the black market.
Experts believe that over time, if patrons are used to purchasing their products from dispensaries and come to expect a certain level of quality, then, the black market will dry up and raised taxation on marijuana can be slowly increased without consumers leaving the market. For example, how many black-market cigarettes are being sold today even though there are higher taxes placed on tobacco? There are not many farmers growing tobacco nationally to sell to the black market. This is because taxes on tobacco have been slowly raised over time.
Maybe California lawmakers need to take a page from other states who have a positive revenue surplus and still have a sizeable tax on marijuana.