Will California's Pot Law Limit Illegal Marijuana Sales?

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A cannabis display in Los Angeles, California in December 2017. Getty

The new year brings with it a new age of legal marijuana: As of Monday, the growing, sale and use of recreational cannabis in California is now legal for individuals over the age of 21. But will it change much in the state?

Implementing the new law requires an impressive amount of regulation, and the new rules—many of which have yet to be finalized—are extensive. But the changes are unlikely to have much of an immediate impact on California's robust illegal marijuana production. While the legal market for marijuana will grow, it's not clear the criminal market will shrink: Marijuana businesses may decide more profits can be made operating illegally.

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A "budtender" in Los Angeles, California in December 2017. Getty

Pro-pot advocates presented Proposition 64 to voters in 2016 as a way to move the illegal marijuana market out of the shadows. Legalization, the argument went, would alleviate pressure on the state's criminal justice system; bring growers under government regulation, thereby ensuring that production was safe for users and the environment; and, through taxes, generate as much as $1 billion in new revenue for the state, with local governments free to join in and add taxes on top of the state's. In short, it would create an orderly, legal market where users could access marijuana and the government could make some money in the process.

That moment has arrived, and while a number of aspects of legal marijuana sales will change—such as new taxes, licensing, testing and packaging requirements—much about the market in general will remain the same. There are a couple of reasons for that:

First, marijuana use has long been popular in California. Government and other surveys have consistently ranked the state as having one of the highest use rates relative to the rest of the country. When the state's voters made California the first state to legalize medical marijuana in 1996, it ushered in a quasi-legal market for the drug. The 1996 law was written broadly, and the state legislature waited 20 years before offering any comprehensive regulations. As a result, anyone with a health need, as well as any adult savvy enough to navigate the minimal restrictions, could legally buy cannabis products at medical marijuana dispensaries. In 2018, more pot shops will emerge and some more people are likely to patronize them, but the overall change is unlikely to be dramatic.

Second, large amounts of marijuana are grown illegally in California. In the 1970s, Mexico and South America supplied most of the cannabis consumed in the United States. The war on drugs with its focus on border interdiction provided a tremendous incentive for domestic cultivators and fueled the growth of a multibillion-dollar agricultural sector in state. Growers currently produce more than enough for California's own residents, with the excess presumably headed for other parts of the country and beyond.

Will the new law change that? Probably not. A recent economic analysis prepared for the California Department of Agriculture estimated that legal recreational and medical use in California will account for only 19 percent of the total production. In Washington state, cannabis regulators estimated a similar figure for legal sales in the first years after it passed its recreational use law in 2012.

Some number of producers in the illegal market probably will emerge from the shadows. But it is worth noting that compliance with the various regulations will come with a hefty price tag. Marijuana growers, for example, will need to obtain permits, invest capital to track their water use and ensure that they are not harming the environment. These business owners will have to factor in the impact such expenses will have on their bottom line. The increase in costs will come at a time when the expansion of the legal market is likely to cause prices—and in turn, revenue—to drop. As a result, while many will decide to comply, we suspect that a significant number will not, at least in the near to medium term.

For some, the costs may not pencil out, with the compliance spending washing out profits. Others may want to make the investment, but the nature of their business limits their ability to borrow since federally regulated banks are reluctant to lend money to people in the pot business. Finally, some may simply see little reason to change what they are doing, and continue to operate in the illegal market.

California's new recreational marijuana law will change a number of things, including creating a new source of tax revenue. Pot regulators, too, will face a growing challenge over implementation. But don't expect the illegal cannabis market to change dramatically.

Patrick Murphy is research director and senior fellow at the Public Policy Institute of California. John Carnevale is president and CEO of Carnevale Associates.