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.

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

  1. One must obtain a medical exemption to have any hopes of paying a reasonable price for cannabis in San Francisco. Legalization also ruined the cannabis edibles market with ridiculous strength and package-size limits that end-up pricing edible THC products far higher than their intrinsic value.
    Legalization ruined cannabis in San Francisco. Ask anyone.

  2. If you have deep pockets, you undercut the competition when moving into a new market territory and put them out of business. After that you can the raise the prices all you want. I’ve watched the supermarkets do it for years.

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

    1. It’s complex, there are boutique growers with integrity who produce an organic product but there are others who don’t care and use horrific “systemic” pesticides that go into the plant tissue, and fungicides that are carcinogenic and mutagenic. The ideal solution would have been a simple “grow your own” law where you get a license that lets you do small grows outside in the sun as outdoor weed is much easier to grow and less prone to pest issues. Indoor in a challenge to do organically. Some counties banned outsdoor weed so we have the spectacle of “greener than thou” California forcing people to grow indoors off fossil fuels!

      1. yeah, grow your own ! You must live in cali. The goal is tax extorsion. How do you think pols can claim their state books are in the green ? Extorsion, fraud and out right theft at the point of a government employee with a confiscation order from a crooked judge.

        1. I’ve always said, pot is not legal. It’s organized crime, courtesy of big guv!
          Legal means you can grow it yourself. Fat chance. Government is 100% thieves and crooks.

  4. Yes, taxes are bad in America. But turning people into drug addicts just makes the problem worse.

    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.

  5. 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.

  6. 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.

  7. 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.

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

  9. 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.

      1. Ah yes, the uber duber stoner with ridiculous claims about how much skill there is in growing his primo “ganja.” Tom, that was the tipoff. I laugh at you rastafarian wannabees.

        Tom, for starters, get 100-gallon soft-sided pots. They’re quite cheap. Truism: The bigger the pot, the bigger the plant. I keep records, and in a 100-gallon pot a healthy plant will yield about 3 pounds. (To be exact, the last time I grew, I got 49.3 oz of dried bud from one plant.) Secondly, MJ doesn’t have to be pruned any more than tomato plants. How do I know? I grow it next to the tomatoes. Thirdly, the amount of work is minimal. Fertilize once a week. Takes about 5 minutes if that. Pay attention to how much water: enough but not too much. That’s it. Just for grins, I had my “ganja” tested, and the THC content was 22%.

        As harvest approaches the fan leaves start turning yellow, and you have to pick them off of the plant once a week. Total labor: 4 hours. Harvest isn’t fun, but it’s no more so than picking tomatoes and canning them. A 3-pound MJ plant takes about 4 hours to disassemble, including labor associated with drying and trimming. At $15/hour, eight hours’ labor comes to $2.50 an ounce. Grow from seed, and that cost including fertilizer is about 50 cents an ounce, maximum.

        We agree that the gov’t should stay out of it, but you have laughably overstated the difficulty. I grow sweet corn, a several varieties of berries, green beans, potatoes, beets, apples, pears, and salad greens. MJ is one of the easiest, at least outdoors. Indoors is a much bigger hassle (spider mites), and yields are significantly lower. But there’s no need to grow indoors for most people. MJ is a weed. It’s easy to grow, regardless of what you claim.

        I get my numbers from direct observation. The bottom line is that marijuana is viciously overpriced. The Army of American Gardeners tends to be older, so there’s plenty of hesitation. That’s changing as MJ becomes more mainstream. The entire MJ business is going to look very different in 20 or so years as it becomes clear just how overpriced the stuff is.

        1. Now that I’m on a roll, let’s talk about edibles. I’ve made candy, but these days I stick to butter because I find it easier. The standard recipe calls for 2 ounces of bud and 2-1/2 lbs of butter, but I use 4 ounces. Why? Because I have so much MJ. A pound of MJ will make 7 pounds of my extra-strong cannabutter. That’s enough butter for 900 to 1,000 spiked Toll House chocolate chip cookies, any one of which puts me out like a light.

          Last time I did the numbers, each cookie costs me about 3 cents for the MJ ($24/900 = 2.7 cents) + about a nickel for the butter used to make cannabutter + the flour, the chips, etc. Call it about a dime per (it’s actually less) cookie. If I bought the MJ at retail, rather than 2.7 cents for the MJ, each of my cookies would use 78 cents of MJ per cookie. Price out the MJ and edibles in the “legal” shops and you’ll see just how overpriced all of this is.

          Candy’s going to cost more and generally be more of a hassle to make, although it’s not THAT hard. As MJ rolls out across the country, there’ll be high profits for a while until the customers realize the degree to which they are being ripped off by Stoner Inc., with the full partnership of tax-hungry state governments. I see it where I live. It’s actually harder and harder to even give it away. Around here, the people who like MJ often grow it themselves.

          Any stoner can do it, and anyone who can read a cookbook can make their own edibles.

          1. One more thing: If you grow it in the back yard, grow two plants just in case one of them doesn’t do well. It happens. And remember: The bigger the pot, the bigger the plant.

            1. Something else. Tom, our uber duber stoner, repeats the mantra that MJ is only a plant, as if that means anything. Guess what, Tom? Most drugs come from plants, including heroin, cocaine, and meth. The problem with the stoners, or at least a big chunk of them, is that they want to legalize everything. Oddly enough, many of the liberals will then turn right around and attack the pharmaceutical companies for making opiates, while wanting less-refined and less-safe versions sold freely on the streets.

              Yes, Tom, MJ is just a plant. So what?

  10. 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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