From California, where there are more than three times as many illicit cannabis dispensaries than licit ones, to Oregon, where the State Police Sergeant laments a growing problem with illegal marijuana, the black market for weed has persisted in states that have legalized the drug. Advocates of legalization have painted a rosy picture of a flourishing legal market while the illicit market withered–a picture far from reality in 2019. While a small black market is inevitable, states can still cripple it by relaxing their regulations on the legal market and restricting the regulation authority of municipalities on cannabis businesses.
Legalization advocates relied on a few key assumptions to make their case: First, that cannabis consumers would almost always prefer legal, state-sanctioned weed over the illegal stuff. The second was that entrepreneurs, seeing a fruitful business opportunity, would rush into the marijuana market and crowd out illegal competitors.
Neither presumption has turned out to be true.
A 2017 survey by the Cannabis Consumers Coalition in Colorado contacted 17,000 Coalition members and asked from where they buy their marijuana. It found a majority of respondents still purchase illicitly from dealers or friends, often because they trust those who have been selling to them since the years before legalization. Moreover, legal marijuana is almost always more expensive than illegal marijuana. Pricenomics.com, a website that advises companies on content marketing, states that consumers in most states can expect to save 10 percent by purchasing black market weed. Elsewhere, savings are even larger: Cameron Wald, the Executive Vice President for California marijuana company Project Cannabis, claims that “if you’re a consumer and you can go somewhere and get 40 percent less price for what they think is the same product, you’re going to go there.”
However, the fallacy of the second presumption–that authorized dispensaries would pop up everywhere in legal states and put dealers out of business–has been more responsible for the thriving black market. The primary problem with this presumption lies in that it portrayed states as bounded entities with self-contained cannabis markets. Instead, weed exportation across state lines has become more commonplace. In Oregon, a glutted legal market has yielded low prices and tiny profit margins for many marijuana cultivators, prompting them to send their weed across state lines to turn a better profit. Because of the Idaho’s proximity to Oregon, Idaho state troopers have reported confiscating more marijuana than usual. Drug enforcement authorities in Colorado also remain hard at work finding individuals growing more weed than the state permits and sending it across the border: In May 2019, authorities seized over 80,000 cannabis plants from people who had exceeded the state law’s 12-plant limit and intended to export the surplus across state lines. Marijuana growers in one of the 11 legal states who want to make an extra buck can and have grown more plants than what state law sanctions and have sold the surplus.
In the long term, national uniformity in cannabis laws is the only solution to this problem. As long as most states outlaw recreational marijuana, black market demand–and the ability for growers to earn untaxed money through illegal exportation–will exist. While increasing enforcement could also stifle the still-thriving black market, it would defy much of the logic behind legalization, which sought to end Drug War-era strategies that were both ineffective and harmful to Black and Latinx communities. With a Republican majority in the Senate and no consensus in the Democratic House on cannabis, national legalization is a distant goal. Thus, a black market borne out the cross-state exportation is inevitable.
Nonetheless, states like California and Massachusetts, where illicit operations are still common within the state, can still weaken their black markets by easing weed market regulations and limiting local control of marijuana policy. Illegal marijuana vendors outnumber legal ones more than three to one in California: stifling, labyrinthine regulations are responsible. California, for example, requires licensed marijuana businesses to have hired security, an alarm system, and video surveillance–even stipulating a minimum camera resolution. Massachusetts also takes security seriously, requiring things like monthly inspections of security equipment and the maintenance of trees and bushes outside of the dispensary to ensure no one can hide in them. Even in liberal, legal states, relics of Reefer Madness-era anxieties about cannabis shape policy. Needless to say, following regulations in Massachusetts and California requires both personnel and money, investments that small-scale dealers are unlikely to be able to afford. When dealers do not enter the legal market, they are not subject to state law and thus are free to export the drug across state lines, worsening the nationwide black market. Their product creates many of the problems legalization sought to resolve: it is unregulated and potentially tied to criminal networks. Moreover, states are unable to reap the tax benefits of illicit businesses.
On the other end of the spectrum, Oregon created simple regulations to provide easy access to the licit market. Its marijuana law, for example, “does not authorize” any of the aforementioned regulations relating to security and surveillance. Thus, legal pot shops abound, prices for licit cannabis are low, and the black market within the state is weak.
Devolution of regulatory authority to local jurisdictions has also stifled the legal market. In California, more than 80 percent of municipalities have banned marijuana businesses outright even though fifty-seven percent of voters supported the ballot measure legalizing the drug. This has created vast “weed deserts” where the only option is the black market. And although the Massachusetts recreational market has sped up since the first shop opened in November of last year, municipalities can adopt zoning bylaws to outlaw marijuana operations. The Massachusetts cannabis law requires Host Community Agreements (or HCAs) between the business and the municipality before it can begin operations. The “community impact fees” and other required contributions that Massachusetts communities have demanded through HCAs increase the barrier to entry to the legal market.
Restricting local jurisdiction over marijuana policy may prove difficult, as marijuana is a divisive issue, local control is a tradition in many states, and “not in my backyard” (NIMBY) attitudes reign supreme in suburbia. But, it is well within the authority of states to hamper municipal voices on this issue, and if they want to crack down on illegal marijuana, they should.
As long as most states still outlaw recreational marijuana, a black market based on cross-state exportation will flourish. But states can still erode intra-state illicit operations by easing regulations and limiting local control. Nonetheless, states should be wary not to embark on a frenzy of deregulation: Lower prices and more legal cannabis businesses is the goal. But Oregon may have gone too far in lowering the barrier to entry of the legal market. Its glutted market has added more fuel to the interstate black market because cultivators export their product across state lines due to small profit margins in the legal market. This suggests that there are Goldilocks conditions for marijuana legalization: regulate too much, and not enough legal dispensaries will enter the market. Deregulate too much, and prices will plummet so low that a cross-state black market will flourish.
Now that the promises of legalization have not panned out in California and Massachusetts, making the case to states that have not legalized yet will become harder. Thus, advocates must alter their message: Rather than making the same broad case for legalization, they must begin to endorse specific legalization strategies that hamper the black market.
Photo: Image via Adobe Stock Images
THIS POST BROUGHT TO YOU BY NEW LEAF CANNABIS BUSINESS CONSULTING
INTERESTED IN GETTING A CANNABIS BUSINESS LICENSE? Visit our New Leaf Cannabis Licensing Specialists website www.newleafcannabisconsulting.com or call 888.791.5323 to learn more about our services!