Local bans on the sale of marijuana allow illegal markets to flourish in rule-of-law states

One of the main promises of marijuana legalization is that the reform could help curb the illegal market by giving adults of legal age legal access to stores where products are inspected and IDs are checked. But not all states have had the same track record in fulfilling that promise, and a new report shows that local opt-out policies are a key factor.

Leafly and Whitney Economics teamed up to analyze the relationship between opt-out laws and unregulated sales. A report released Thursday found that states where cannabis stores are more accessible — without as many jurisdictional gaps — have been far more effective at rooting out the illegal market.

For example, states with 20 to 40 marijuana dispensaries per 100,000 residents have had the most success in combating illegal sellers, with 80 to 90 percent of adults reporting that they buy marijuana from regulated stores.

Via Leafly/Whitney Economics.

By contrast, states with fewer than 10 dispensaries per 100,000 residents still have a thriving illegal market, with about 30 to 50 percent of sales coming from the legal market, the report said.

Colorado, Oregon, and Alaska stand out as examples of early states that enacted policies that allowed licensed marijuana shops to become widely available to adult users.

Colorado had 18 marijuana dispensaries per 100,000 people at the time of the July analysis, and nearly all recreational marijuana sales (99 percent) occur at licensed retailers. Oregon has 19 stores per 100,000 residents, and the state also appears to have the majority of sales (75 percent) in the regulated market.

Via Leafly/Whitney Economics.

But other states, such as California, where local governments can refuse to allow most types of marijuana licenses in their jurisdictions, have been less effective in cracking down on the illegal market.

While a 21-year-old can easily find many California dispensaries in major cities like Los Angeles and San Francisco, more than half of the state’s cities and counties have banned all types of licenses, creating a policy vacuum that allows illegal vendors to continue serve consumers outside the regulatory framework.

California cannabis regulators have tried to draw attention to the problem, with officials releasing an interactive map earlier this year showing exactly where marijuana production is prohibited. Gov. Gavin Newsom (D) signed a bill this week that aims in part to address the problem by preventing local residents from banning medical cannabis delivery services, but the problem is more systemic.

With just three marijuana shops per 100,000 residents in the Golden State, the legal market accounts for only 45 percent of cannabis sales, while the remaining 55 percent continues to go to the illegal trade, according to a new report.

“This report demonstrates that legal, regulated marijuana stores are keeping illegal marijuana dealers out,” said Bruce Barcott, Leafly’s senior editor and lead author of the report, in a press release.

“Fears surrounding local cannabis stores could prompt elected officials to ban cannabis businesses in their cities,” he said. “But adults in every community are already buying and enjoying cannabis, legal or not. Cities and counties that opt ​​out of cannabis are essentially voting to keep their local illegal marijuana markets alive.”

New York City regulators are currently accepting applications for the state’s first adult-only retailers, and the state could soon become another example of how local opt-out policies influence market trends. While a large portion of New York’s municipalities have agreed to allow cannabis businesses, hundreds of cities opted out early this year.

The lesson from the report is that in these opt-out zones, people will likely continue to buy marijuana, but the incentive to switch to a regulated market will be tempered by the lack of licensed access at a convenient location.

In New Jersey, where recreational marijuana sales began in April and where most cities initially chose not to allow retail sales after the reform was implemented, there were 0.3 dispensaries per 100,000 people as of July. Accordingly, the illegal market continued to dominate the sale of cannabis, accounting for 80 percent of purchases.

Via Leafly/Whitney Economics.

Another factor likely to hinder efforts to eradicate illegal sales is high state and local taxes on products sold in regulated stores. Analysts and stakeholders have long argued that overtaxing marijuana will deter people from switching to the legal market, so they’ve urged lawmakers to take that into account when crafting legalization policy.

“Access and taxes are the keys to the migration of customers to the legal market,” said Beau Whitney, founder of Whitney Economics and co-author of the report. “And right now we’re seeing the illegal sale of cannabis being supported by opt-out cities and counties.”

The new report is based on an analysis of public licensing data from state marijuana regulators and population information from the 2020 U.S. Census. The percentage of cannabis sales from illegal and legal sources was calculated “by comparing annual cannabis sales in each legal state to that state’s Total Market Estimate (TME),” according to the report’s methodology section.

Local opt-out decisions not only benefit illegal marijuana sellers, but the report found that regions that block regulated marijuana businesses are more likely to face public health problems related to untested products, lose opportunities for job creation and lose revenue from local tax options.

“Legal regulation of cannabis is working. This puts illegal marijuana dealers out of business and gives minors fewer opportunities to access weed. It protects public health by removing spoiled products from circulation,” the report concludes. “It allows law-abiding adults to abide by the law while creating jobs and tax revenue. Agreed: That’s right.”

A preliminary 2020 report commissioned by the California Latino Chamber of Commerce and Weedmaps also found that California’s local bans on marijuana businesses have helped the illegal market flourish and deprived the state and municipalities of tax revenue, making it even more urgent to to offset economic losses caused by the coronavirus pandemic.

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