Cautionary Tale of Local Control, Red Tape, and Too Few Cannabis Retailers

As it enters the final stages of development, New York state regulators may want to take heed of how California’s heavy-handed regulatory and tax approach to legal cannabis has led to an out-of-control underground market – at least if the East Coast wants to avoid a similar fate.

Desperate for an approach that will actually drive illicit actors and cartels out of the cannabis business, California Attorney General Rob Bonta – himself a longtime ally of legal marijuana operators – announced a wide-ranging rebrand and expansion of the 1980’s War on Drugs’ CAMP program, now targeting illegal growers year-round instead of only during the summer.

Bonta’s move comes more than four years after the state launched its regulated cannabis market, and the reality of California’s market structure – high state and local taxes, tough barriers to entry for legacy operators, and the ability of cities and counties to ban cannabis companies entirely – is now widely recognized as broken.

The news came just a weeks after a report from Leafly and Whitney Economics confirmed what many in the industry had already believed: That giving cities and counties the ability to ban cannabis is a major factor in thriving illicit markets.

“The more per-capita cannabis stores, the fewer street dealers,” Leafly reported.

Lessons for New York – and other new markets

It’s a lesson New York should take to heart as it tries to get its own adult-use cannabis market off the ground. Roughly half of the municipalities in the state have already chosen to opt out of the program, according to the Rockefeller Institute of Government.

Not only that, but New York City has seen a rush of unlicensed cannabis dealers since the state legalized possession last year and now is attempting a crackdown of its own.

There’s a similar situation progressing in Washington, D.C., where gray market retailers have been competing with licensed medical cannabis companies for years, and the city is trying to shut many of them down.

The nation’s capital problem, however, stems more from a refusal by Congress to allow for a regulated adult-use market, instead of the systemic problems California – and now New York – must deal with.

The policy lesson is a simple one, however: If regulators want to replace illicit cannabis markets with legal and regulated companies, they have to provide sensible economic incentives, not just to businesses but to customers as well.

That means lowering the barriers to entry so more companies can afford to join the industry, keeping costs down so retailers can compete on price points, and allowing for as many retailers as market demand will support.

Anything less than that is essentially an invitation to criminals who would be more than happy to undercut legal cannabis markets. Just ask California.