California considers legislative changes to its legal cannabis market
Photo 162875817 © David Tran |


California considers legislative changes to its legal cannabis market

California’s legal marijuana market is plagued by high taxes and burdensome regulations.

California lawmakers are considering a quartet of interesting legislative proposals aimed at addressing the state’s cannabis market struggles. These include proposals to escalate efforts to shut down unlicensed marijuana businesses, aid legal cannabis industry licensees in the collection of debt, and liberalize rules governing the social consumption of marijuana and other legal products in lounges.

Unlicensed marijuana sales have continued to dominate the California cannabis market even after legalization. In a 2022 report, Reason Foundation estimated cannabis demand within California and found that unlicensed sales accounted for two-thirds of all marijuana sales. There were two primary causes of consumers continuing to buy from the black market:

  1. The accumulation of wholesale and retail taxes at the state and local levels led to a tax-induced price disparity between legal and illegal marijuana products. Depending on the local jurisdiction, the cumulative tax per pound on legal cannabis at retail ranged between $677 and $1,440, excluding the effect of income taxes on licensed businesses. These cannabis taxes are passed onto consumers when they’re built into the price of legal marijuana products. Survey data from the International Cannabis Policy Study reveals consumers generally prefer to buy cannabis products legally if the prices are comparable, but they will turn to illicit vendors if legal products become expensive by comparison. Consumers’ perceptions of prices for legal versus illegal goods are largely accurate.
  2. Legal cannabis retailers are comparatively sparse and highly concentrated within a handful of California jurisdictions. In 2022, more than half of the state’s 929 storefront cannabis dispensaries were in just 18 cities, while 80 percent of local jurisdictions had banned the legal sale of marijuana. In total, California boasted only one legal cannabis retailer per 29,282 state residents, while neighboring Oregon boasted one legal cannabis retailer for every 6,145 residents.

Following recommendations from the Reason Foundation report, California made legislative strides last year to shift sales from unlicensed to legal sellers. After Reason modeled the fiscal effects of eliminating the statewide cultivation tax, lawmakers repealed it for the 2023 fiscal year. They also offered state support to local governments that agreed to offer commercial cannabis licenses.

Those changes were a great start to addressing the ongoing dominance of the illicit cannabis market. Now state lawmakers have proposed several additional legislative measures. Assembly Bill 1448 would allow local governments to keep half of any penalty amounts assessed against unlicensed cannabis operations. Currently, those penalties are deposited into the state’s general fund after reimbursing prosecutors for their costs. This bill aims to incentivize local governments to use more prosecutorial powers against illegal cannabis operations with the prospect of financial gain.

Separately, Assembly Bill 1171 would grant a private right of action to licensees, allowing legal cannabis businesses to sue their unlicensed competitors in state court. Courts could order an unlicensed business to close and order it to pay attorney fees and costs to the plaintiff.

These bills go far beyond leveling the playing field to make the legal marijuana market more attractive and would likely bring back parts of the failed war on drugs. They would conflate criminal law with civil law and create incentives for policing for municipal profit. If lawmakers are concerned that police and prosecutors are not faithfully executing existing cannabis laws, they could set forth strict standards of nonfeasance by public officials.

Assembly Bill 766 attempts to address a common concern among licensed cannabis distributors—the nonpayment of invoices by legally operating retailers. Many legal cannabis dispensaries across California have become notorious for not paying their wholesale suppliers. Whether through poor management or due to challenging market conditions, distributors have reported that they have placed as much as 85% of retail accounts on some form of credit hold due to nonpayment. Assembly Bill 766 would allow wholesalers to file complaints against delinquent retailers with state regulators. It would authorize regulators to forbid cannabis retailers from accepting new shipments of inventory if they become more than 45 days delinquent on any existing invoice.

Evaluating the creditworthiness of customers is a valid and essential market function. Often, competitors at the same stage of the supply chain can mutually benefit by sharing information about the creditworthiness of customers. However, this market function usually does not require state force to prevent a private business from making purchases. Indeed, news reports indicate the Cannabis Distribution Association is already sharing this information privately, so state intervention should be unnecessary.[SS1] 

Finally, Assembly Bill 374 would authorize local jurisdictions that allow social consumption lounges to expand the activities permitted within those lounges. Specifically, lounges could be allowed to sell non-cannabis-infused food and nonalcoholic beverages to customers. Lounges could also offer live music and sell tickets to live performances. The strict ban against these activities never made sense, so this proposal could make lounges a more attractive place to visit.

California’s legal marijuana market is plagued by high taxes and burdensome regulations. While some of these bills are well-intentioned and aim to help legal cannabis businesses better compete with the black market, they’re more likely to add burdensome layers of bureaucracy and increase policing targeting minority communities and adults who choose to use cannabis legally. California would be better served reducing taxes and streamlining regulatory rules so that adults who would buy legal marijuana products if they were priced similarly to black market products can do so.