Proposition 64, legalizing recreational cannabis, was supposed to stop illegal cannabis sales in California. With the 2016 law, legal cannabis shops were supposed to replace the black market. Everyone was supposed to benefit: the state was supposed to reap new tax revenue, cannabis users were supposed to have a legal place to buy the drug and legal shops were supposed to flourish.
Instead, illegal cannabis sales are booming while legal sales struggle. Per The Los Angeles Times, about 80% of the cannabis sold in California is still sold through the black market. The New York Times reported that legal cannabis sales in 2018 were more than 15% lower than in 2017 when only medical cannabis was legal. The weak sales have a fiscal impact on the state. According to CNBC, California was forecast to make $643 million from cannabis taxes in 2018. Instead, the state only made $345 million.
Analysts have not yet agreed on the reason for the booming black market. However, there may be several factors at play.
Factor #1: Taxes
According to The New York Times, California’s tax rate may be one reason for the black market resolve. Legal cannabis shops in the state pay a high tax rate. For example, one legal cannabis shop reported a tax rate of 32.25%. However, black market shops do not pay taxes. This black market tax avoidance allows for lower cannabis prices. One estimate shows that black market cannabis may cost close to $80 per ounce less than legal cannabis.
Factor #2: Unequal Access to Legal Dispensaries
Regional differences in the state may also play a role in the black market cannabis boom. The New York Times reports that despite legalization, about 80% of California towns still do not allow cannabis sales. While large cities like San Diego allow sales, many smaller cities do not. Without access to legal shops, some users may turn to the black market.
Factor #3: Illegal Drug Trade
Although California produces millions of pounds of cannabis per year, residents only consume about 20%. The rest of the cannabis is illegally trafficked to other states. Much of the drug ends up on the East Coast, where it can be sold for a high price. Because cannabis is still illegal at the federal level, legal shops do not participate in the interstate drug trade.
Factor #4: Enforcement
California has had many problems enforcing the laws that require cannabis shops to be licensed. State budget issues interfered with enforcing cannabis license laws. Therefore, the state relies heavily on cities for enforcement. However, many cities also have strained resources. This strain limits their ability to help enforce the laws. The lack of enforcement has allowed the black market to flourish. For example, according to CBS Los Angeles, there are 170 legal shops in Los Angeles. However, there are up to 350 illegal shops in the city, more than double the number of legal shops.
California is not the only state that has had black market problems after legalizing cannabis. Colorado, Nevada and Oregon have also seen a surge in black market cannabis after legalizing recreational use. As states and the federal government continue to grapple with recreational cannabis, it is unclear what the future holds for the licensed shops and for the black market which competes with them.
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Fuller, Thomas. “‘Getting Worse, Not Better’: Illegal Pot Market Booming in California Despite Legalization.” The New York Times, April 27, 2019. Accessed June 13, 2019.
Statista. “Most Expensive U.S. Marijuana Dispensary Prices Compared to Street Prices as of January 2016, by State (in U.S. Dollars).” Accessed June 13, 2019.
McGreevy, Patrick. “California’s Black Market for Pot is Stifling Legal Sales. Now the Governor Wants to Step Up Enforcement.” The Los Angeles Times, February 18, 2019. Accessed June 13, 2019.
Fuller, Thomas. “Now for the Hard Part: Getting Californians to Buy Legal Weed.” The New York Times, published January 2, 2019. Accessed June 13, 2019.
Daniels, Jeff. “California Wages War Against Illegal Weed Farms; Gov. Newsom Wants Trump to Pay Some Costs.” CNBC, April 3, 2019. Accessed June 13, 2019.
CBS Los Angeles. “One Year Later: How The Marijuana Black Market Is Affecting Local Dispensaries.” February 11, 2019. Accessed June 13, 2019.
Malanga, Steven. “Marijuana’s Black Market 2.0.” City Journal, June 10, 2019. Accessed June 13, 2019.