Local Marijuana Business Bans Are Helping Illicit Markets Thrive In Legal States, Report Finds

One of the key promises of marijuana legalization is that the reform can help curb the illicit market by giving adults legal access to shops where products are tested and IDs checked. But not all states have the same experience of delivering on that promise — and a new report suggests that local opt-out policies are key factors.

Leafly and Whitney Economics have teamed up to analyze the relationship between opt-out laws and unregulated sales. The report, released Thursday, found that states where cannabis stores are more widely available — without so many jurisdictional loopholes — have been shown to be much more effective at wiping out the illicit market.

For example, states where there are 20-40 marijuana dispensaries per 100,000 population have had the greatest success in competing with illegal sellers, with 80-90 percent of adults reporting that they buy their cannabis from regulated storefronts.

Via Leafly/Whitney Economics.

By contrast, states where there are fewer than 10 pharmacies per 100,000 population tend to continue to see a thriving illegal market, where about 30-50 percent of sales are made on the legal market, the report finds.

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Colorado, Oregon and Alaska stand out as examples of early-adopter states that enacted policies that made licensed marijuana stores widely accessible to adult consumers.

Colorado had 18 marijuana stores per 100,000 people at the time of the July analysis, and virtually all recreational cannabis sales (99 percent) are at licensed retailers. Oregon has 19 stores per 100,000 residents, and the state also appears to have made most of its sales (75 percent) within the regulated market.

Via Leafly/Whitney Economics.

But other states like California, where local governments can opt out of allowing most types of cannabis licenses in their jurisdictions, have been less effective at reducing the illicit market.

While a person 21 and older can easily find a plethora of California pharmacies in major cities like Los Angeles and San Francisco, more than half of the state’s cities and counties have banned all types of licensing, creating a policy vacuum that allows illegal sellers to continue servicing consumers outside of the regulatory framework.

California cannabis regulators have been trying to draw attention to the issue, with officials releasing an interactive map earlier this year showing exactly where marijuana businesses are banned locally. Governor Gavin Newsom (D) signed a bill this week that aims in part to address the problem by preventing places from banning medical cannabis delivery services, but the problem is more systemic.

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With just three marijuana stores per 100,000 residents in the Golden State, the legal market accounts for just 45 percent of cannabis sales, with the remaining 55 percent going to the illicit trade, the new report finds.

“This report shows that legal, regulated cannabis stores have bankrupted illegal marijuana dealers,” Bruce Barcott, Leafly editor-in-chief and lead author of the report, said in a press release.

“The fear of local cannabis shops may 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. The cities and counties that skip cannabis are essentially voting to keep their local illegal marijuana markets up and running.

New York regulators are currently accepting applications for the state’s first adult retailers, and the state could soon serve as another example of how local opt-out policies affect market trends. While a large portion of New York City councils chose to allow cannabis businesses, hundreds of cities opted to opt out of a deadline early this year.

The lesson learned from the report is that in those opt-out areas, people are likely still buying marijuana, but the incentive to switch to the regulated market will be dampened by the lack of conveniently located licensed access.

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In New Jersey — where recreational marijuana sales opened in April and where a majority of cities initially chose not to allow retailers following the reform reform — there were 0.3 pharmacies per 100,000 in July. people. Accordingly, the illicit market has remained dominant over cannabis sales, accounting for 80 percent of purchases.

Via Leafly/Whitney Economics.

Another factor likely to hinder efforts to eradicate illegal sales is the high state and local tax rates on products sold in regulated stores. Analysts and stakeholders have long argued that imposing excessive taxes on marijuana will deter people from making the transition to a legal market, and so they have urged lawmakers to consider this when drafting legalization policies.

“Access and taxes are the keys to migrating customers to the legal marketplace,” said Beau Whitney, founder of Whitney Economics and co-author of the report. “And right now we’re seeing illegal cannabis sales propped up by opt-out cities and counties.”

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

Not only are local opt-out decisions beneficial to illegal marijuana sellers, but the report also found that areas that block regulated cannabis businesses are more likely to face public health issues related to untested products, lose job opportunities and lose revenue from local tax options.

“Legal cannabis regulation works. It puts illegal marijuana dealers out of business and gives minors fewer opportunities to access marijuana. It protects public health by keeping spoiled products out of circulation,” the report concludes. “It empowers law-abiding adults to comply with the law, while creating local jobs and tax revenue. Opt-in: it’s the right thing to do.”

An earlier 2020 report commissioned by the California Hispanic Chambers of Commerce and Weedmaps also found that local bans on marijuana businesses in California have helped the illegal market thrive and robbed the state and municipalities of tax revenues that have been made all the more urgent to settle the to offset economic losses from the coronavirus pandemic.

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