Five years after cannabis legalization in California, the sector seems to be doing well: Californians smoke a joint, relax with cannabis coffee, and can even have soft drinks with THC (the active ingredient in marijuana, ed.) delivered. But appearances can be deceiving: according to experts, only 10 to 20 percent of the market share is in the hands of legal companies.
In 2016, marijuana was legalized in the state thanks to a citizens’ initiative, “Proposition 64”. However, the bill that should have solved the drug problem in one fell swoop has some serious shortcomings. Well-intentioned users, entrepreneurs, and politicians pay the bill for this.
First, the municipalities can decide for themselves whether they want to participate in the legalization of the sale of marijuana. However, the past five years have shown that most cities in California are not yet ready to do so. The possibilities are therefore very limited for both users and entrepreneurs.
However, in municipalities where cannabis has been legalized, entrepreneurs complain about high taxes, a limited number of licenses, and large investments to comply with the rules. In addition, it is often difficult for users to distinguish whether they are buying legal or illegal weed in a store. According to expert Ophelia Chong, legal companies can only survive if they also continue to operate in the black circuit.
Tolerance culture
That black circuit was able to flourish in the twenty years before legalization thanks to a kind of tolerance culture. For example, in the mid-1990s, the cultivation and consumption of medicinal cannabis were allowed in San Francisco. But not manufacturing and trading.
In theory, only patients were allowed to use home-grown weed only on doctors’ advice, but smart entrepreneurs quickly stepped into that gap. They established large plantations and set aside money to cover the damage caused by possible raids or lawsuits. Those who dared to take a legal risk could make big money with the marijuana trade. In fact, the market was so attractive that Mexican drug cartels moved part of their production to California.
Local authorities were, therefore, at a loss. As soon as one plantation was rolled up, a new one was started up again. More and more politicians in the state became convinced of the need for new legislation. However, they were overtaken by political reality: with Citizens’ Initiative 64, voters also forced the legalization of recreational use.
70% tax
But that is not a fat pot for the time being. Cannabis entrepreneurs who follow the letter of the law have to forfeit a large share of the profits: their sales are effectively taxed at about 70 percent. Because the trade and cultivation of marijuana at the federal level remain illegal, there are no deductions or tax credits for these entrepreneurs.
In addition, some local politicians see the cannabis industry mainly as a cash cow that has to generate tax revenues. After twenty years of a policy of tolerance, there are, therefore, insufficient incentives to operate completely legally. “If 10 percent makes a profit, it’s a lot,” said Adam Spiker, a cannabis industry representative in the southern state of the state.
As a result, little has come of the promise that legalization would also become a means of emancipating ‘black and brown minorities’. They were disproportionately hit by the illegality of cannabis, both as consumers, growers, and traders. However, experts argue that these groups have barely been able to earn money from the legalization.
Smaller entrepreneurs in particular – to which the aforementioned minorities usually belong – run into numerous practical problems: they do not receive permits from the authorities, no loans from the bank, and no one wants to rent out business premises to them.
In doing so, they lose out to the drug cartels and major legal competitors. These large companies are sometimes backed by investment companies and even use celebrities for marketing. Weed SMEs don’t have that luxury.
Therefore, the problems in California are a warning to (local) governments that see legalization as a bite-sized solution for the drug problem in their region. Also, in 2021, authorities in California seized more than 1.2 million cannabis plants and 81,000 tons of weed.
