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.Cannabis Conundrums

California is awash in pot, the illicit market is flourishing, and the legal market is overtaxed and overburdened

If one wants to understand the current state of the California legal-pot business, one can read all the market analyses, listen to businesspeople and experts at trade shows, and talk to dispensary owners across the state. 

Or, one can simply check out the post on Google Maps where a guy enthused about paying just $75 for a quarter pound of weed from an illicit dispensary on a funky block in the Koreatown neighborhood of Los Angeles. In his review, he even included a picture of the massive sack of pot he brought home, complete with a price tag informing the buyer that the product was sold “as is.” 

“This shop makes me hate all the other shops with their ridiculous high prices,” the reviewer wrote. “Good quality at a reasonable price.”

More than “reasonable,” really. More like “eye-poppingly cheap.” Currently, the LA Cannabis Co. offers one strain of raw bud—Grape Stomper—for $106 an ounce. On a per-pound basis, that’s nearly five times what this guy paid for his unidentified, unlabeled, untested, illegal weed.

That review was written nine months ago, but the problem it so perfectly illustrates has only gotten worse: California is awash in pot, the illicit market is flourishing, and the legal market is overtaxed, overburdened, and, as one retailer recently put it, “in absolute free fall.”

The fact that the dispensary on the Google Maps site is now listed as “permanently closed” probably means that it was busted in one of the raids that cops routinely conduct across the state and especially in cities. The Koreatown storefront, which has its own Yelp page where a couple of dozen people wrote reviews for it, seems to have been in operation for at least a couple of years, and there’s a very good chance that it simply renamed itself and set up shop elsewhere.

Police raids on pot dealers amount to a game of whack-a-mole, and seem about as effective in stemming illegal sales as pot raids were in the decades before legalization.

The effect on the legal market, and on the state’s finances, can be gleaned from the numbers issued by the California Department of Tax and Fee Administration. In monetary terms, pot sales hit their statewide peak in the second quarter of 2021, with budtenders ringing up $1.56 billion worth of product. In the third quarter of 2022, that number had dipped to $1.27 billion. In San Francisco, sales fell by 21%, a fairly typical showing.

California farmers grew a record amount of pot for the legal market in 2021, creating a massive oversupply. Illicit operators don’t have the same fixed-cost burdens as legal businesses, and none of the tax obligations. 

Hence that $75 sack of bud, and hence the continued struggles of legal-dispensary operators and their suppliers, who cut prices to the lowest possible level and still end up with prices several times higher than street weed.

The state government has made some moves toward reform, but so far they haven’t been nearly enough. The cultivation tax has been temporarily lifted, which was a major boon to growers, but hasn’t done much for the market as a whole. The bigger problem is the 15% state excise tax that comes on top of the regular sales tax and any local taxes (San Francisco has delayed implementing its pot tax in light of the market woes).

Another huge problem is home rule, which allows local governments to ban legal weed businesses or to limit the number of licenses they allow. That has left large swaths of the state without access to legal pot, or with such limited access that illicit operators are able to flourish (though as the Los Angeles example shows, they flourish even in areas with lots of dispensaries when the price differential is wide enough).

A paper—Can Legal Weed Win? The Blunt Realities of Cannabis Economics—recently published by the Agricultural & Applied Economics Association and written by Robin Goldstein and Daniel Sumner of UC Davis, took an optimistic view of the long term future of legal pot, post-federal legalization and interstate commerce. But in the short term, things are likely to remain grim, they found.

“As long as legal weed remains expensive and highly regulated and buyers will continue to find illegal weed a good alternative compared with illegal weed,” they wrote, “the legal weed segment will continue to be severely limited in its potential to get big.”

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