Can California’s legal cannabis industry survive while illegal competitors still operate?
California voters’ 2016 decision to legalize the recreational use of cannabis was mostly driven by the idea that whether or not to use the drug should be a choice left up to adults — not be dictated by laws written in an era in which “reefer madness” was seen as a societal scourge. But it was also sold in part as a smart way to create a large new revenue stream for local and state governments. While Gavin Newsom, then lieutenant governor and now governor, made this argument as one of the leading voices for the Proposition 64 campaign, he also offered some notes of caution. In a May 2018 interview with The San Diego Union-Tribune Editorial Board, he said he expected it would take “five to seven years to substantively address the black market.”
He’s running out of time on that prediction. Five years later, California isn’t anywhere close to the progress Newsom imagined. The latest evidence came last week with the report that revenue from the city of San Diego’s cannabis tax was plunging, mostly because the city’s two dozen authorized legal dispensaries are being undercut by illegal delivery services whose unregulated, untaxed products are much cheaper and which have proliferated because of comparatively tiny startup costs. The city now forecasts revenue of $19.8 million for the budget year that ends June 30, far less than the $25.7 million it previously expected. Broader struggles of the legal cannabis industry have led the Legislature to eliminate some cultivation taxes — and San Diego County supervisors to set low tax rates on the five authorized cannabis stores in unincorporated areas. Assemblymember Matt Haney, D-San Francisco, also wants to help the industry by legalizing the sale of food and nonalcoholic beverages at cannabis retailers and lounges.
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It’s a tall order. As long as illegal cannabis products cost half as much as legal ones — as documented last year by University of California, Davis economists Robin Goldstein and Daniel Sumner — they will dominate sales. Voters’ 1996 approval of a law allowing legal “medicinal” cannabis — with buyers essentially self-attesting to why their health issues required its use — set up a multibillion-dollar industry that often skirted state laws. A prescient 2018 analysis by the Southern California News Group noted that the industry was only emboldened by the fact that Proposition 64 reduced the penalties for most cannabis crimes and eliminated others entirely.
Legal shops in California clearly need a more level playing field to thrive. Given that most illegal sellers advertise their services, authorities have a blueprint for an effective crackdown. But the longer that doesn’t really materialize statewide, the less likely lawmakers who aren’t enamored of a law-and-order agenda will be to pursue it. California will never “substantially address” the black market as a result.
Five years ago, Newsom said he felt “a deep sense of responsibility” to make sure Proposition 64 worked well. It’s time for him to demonstrate that.
—The San Diego Union-Tribune Editorial Board
