Reefer Madness: Demand for Illegal Pot Soars in California Due to High Taxes

It appears that illegal pot growers are giving thanks this holiday for California lawmakers who legalized pot only to fuel demand for illegal cannabis due to massive taxes. It is the same problem that I wrote about in New York’s program in an earlier Wall Street Journal column. Politicians continue to pile on taxes as if they have no impact on pricing and demand. It just seems like free money if you ignore every economic metric and principle.  Even with a recent recognition that they have killed their own market, California lawmakers are being criticized for offering too little too late in terms of tax relief.

Sgt. James Roy of the Riverside County Sheriff’s Department is quoted in Fox News as saying that “The illegal industry is competing with the legal industry and essentially putting them out of business.”

Why? As with bathtub gin after Prohibition, few people would prefer bootlegged products rather than the safer lawful alternatives. The only reason is economics — and the refusal of the California lawmakers to recognize basic rules of supply and demand. Not only is pot cheaper due to the massive taxes imposed on lawful businesses, but it is also being sent to the East Coast where similar price differentials are also fueling the illegal trade.

Despite being a relatively new industry, state and city officials imposed thick layers of regulations, charges, and taxes on the budding businesses. Some estimates put the taxes at 70 percent of current costs.

Even with a recent recognition that lawmakers strangled the industry, a temporary tax cut is not expected to be enough to make lawful businesses competitive. There remain a host of other taxes, required regulatory obligations, and even bars on claiming certain expenses used by other businesses. The result, according to one study, is that “the effective tax rate on marijuana in California ranges from $42 to $92 per ounce, depending on the jurisdiction, compared to an estimated wholesale production cost of $35 per ounce.”

So you have a high demand product that has been strangled out of the legal market by politicians who cannot resist adding their own taxes and demands on these nascent businesses. The result is a bonanza for illegal cannabis growers. The alternative was to show a modicum of restraint and allow this industry and market to stabilize and grow. It would then might produce greater revenue even with lower taxes. That, however, requires the one thing that is seemingly beyond our current political environment: restraint.

85 thoughts on “Reefer Madness: Demand for Illegal Pot Soars in California Due to High Taxes”

  1. Actually the small time for profit grower takes more care to produce a higher quality product than the corporate weed farms.

    1. I agree. Black market pot is fresher, not a hard round rock, and you can always count on it getting you high. Can’t tell you how much I’ve wasted on legal pot that doesn’t get you high even though their label says THC is.

  2. Not an either/or scenario. There’s room for both legal and illegal markets much like, pre- Covid, there was room for movies in the theater and on streaming. Enlightened business interests realize a presence in all markets is a requirement.

    I’ve been involved for a long time, developing new strains for clients. The corporate entity is struggling to control distribution, as it always will in any industry. While they’ll always be just a step behind, the weakness of straight capitalism is that capital controls the markets…, so they’ll always have a near strangle hold.

  3. Governments are never smart about economics. It is why their economic policies are so fraught with corruption. They do not take into consideration the economics involved with their decisions. This is why Capitalism is better than socialism.

  4. I predicted this as soon as blue states starting talking about legalization years ago, and anyone who knows anything about how leftist governments operate probably did the same.

  5. Sounds like moonshine down south. Remember this is how stock car racing got its start. Are these a new version of southern rednecks?

  6. I know directly how much it costs to grow and harvest an ounce of marijuana. This was detailed a decade ago by the RAND Corp., which pegged the production cost at 10 cents per gram ($2.80 an ounce), with that cost projected to decline as farmers adapt their machinery to reduce human labor involved with harvest and preparation. That number is correct, including $15/hour labor without adapted machinery.

    Round it up to $3, which is too high but works here for clarity’s sake, and the markup is at least 50:1. For a small-scale home grower supplying himself and friends, and using no hired labor, and it’s 100:1. Kids, marijuana is easy to grow. Water, sun, and fertilizer is all it takes. Growing and harvesting marijuana is no harder than growing tomatoes and canning them after harvest.

    The commercial industry will continue to exist, just as grocery stores continue to sell tomatoes, but it will never be much of an industry. It’s easier to store marijuana than it is to store tomatoes, especially for people who prefer to consume MJ in edible form. All that person needs to do is turn the product into spiked butter, which can be frozen and kept in a freezer indefinitely.

    The bottom line is that, as MJ becames more acceptable, so too will growing a plant or two in the backyard. One plant will produce 2-3 pounds of bud if grown in a large (100 gallon) pot, and for a moderate user of edibles that’s enough MJ for at least a few years. Smokers would want it fresher, and therefore might grow a plant every year. In any case, these people won’t be paying $150+ per ounce for MJ that they can grow for $1.75.

    It’s simultaneously amusing and frustrating to see this topic “discussed” in various places by people who are clueless about the microeconomics of marijuana cultivation. There’ll be a market for commercial MJ and edibles, but those prices (and tax revenues) will be under serious and growing pressure. There are 100 million gardeners in this country, and as the stigma of marijuana lessens, their inertia will (and in many places already is) diminish. In two or three decades, and probably sooner, marijuana will be for all intents and purposes free. It will be everywhere, like it or not.

    1. I grow legal weed in AZ for myself.Your sub $2 cost is way off for a commercial grower. It takes three months minimum to grow a plant. It requires regular pruning and fertilizer and close attention to get a high quality crop. People don’t work for free so I have no idea where you got your numbers. I grow two plants each year in ten gallon cloth pots and get about seven ounces of superb ganja per plant. I give away (free) a lot of it. The govt has no business annoying citizens and trying to collect tax on a harmless plant that grows everywhere naturally. Govt is the problem. Just leave people alone.

  7. Maybe Maryland state government should be a role model for other states (and Congress) to emulate. Maryland recently opened up many of it’s state government jobs to non-college educated applicants. Previously many non-college job applicants were excluded from even applying for certain jobs.

    A college education is great but so is real-life experience, like operating a small business, operating within a budget and customer-focused. Something many college grads never learn.

    Well-meaning government bureaucrats simply don’t understand what many working class Americans and small business owners deal with every day.

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