Five years after California voters approved Prop. 64’s adult-use cannabis framework, the legal market is still struggling to catch fire, in part, because of a complicated regulatory structure, licensing hurdles and a heavy tax burden.

The Legislative Analyst’s Office—a nonpartisan fiscal and policy research institute for California’s Legislature—estimates that adult-use cannabis businesses operate in less than one-third of jurisdictions statewide.

Law enforcement personnel eradicate cannabis plants from an illegal operation in Southern California. 

Meanwhile, the illicit market continues to bloom. On July 7, the Los Angeles County Sheriff’s Department announced the results of a 10-day sting operation that involved more than 400 law enforcement personnel, who seized $1.2 billion of illegal harvested cannabis and plants last month in Southern California, and arrested 131 Mexican, Chinese and Armenian cartel members.

Investigators said that the operation accounted for only 40% of the illegal outdoor grows in the county, where up to four harvests per year can materialize. If those illicit grows went uninterrupted by law enforcement, Los Angeles County alone would shadow the state-legal market, which brought in $4.4 billion of retail sales in 2020.

California state Assemblyman Tom Lackey, whose 36th District encompasses the bulk of identified illegal operations in the Antelope Valley, said the people who passed Prop. 64 had no intention of creating the “toxic environment,” happening in his backyard.

“But here’s the reality that a lot of people don’t realize is that in California, and we’re very unique to the rest of the country on this whole cannabis issues, is that we allowed the illicit market to flourish for almost two decades, and they became very, very skilled in their delivery models and in their business operations,” he said. “And now we have international cartels that are here and they’re invading our desert for heaven’s sake. Who would have ever thought that they would go to the desert?”

In February, state Sen. Nancy Skinner introduced legislation to loosen some of the licensing and regulation constraints by expanding resources to help city and county governments that don’t have the wherewithal to oversee legal cannabis operations access a state program that would manage certain bureaucratic functions for them. That legislation passed the Senate Appropriations Committee May 3.

Last month, the California Legislature approved a plan to funnel $100 million toward its cannabis industry in an attempt to boost the legal market by helping businesses transition to more permanent licenses. According to Gov. Gavin Newsom’s May budget summary, approximately 82% of California’s cannabis licensees held provisional, or temporary, licenses as of April 2021.

The $100 million in grant funding aims to help cities and counties assist cannabis businesses in completing time-consuming and complicated environmental studies around the impacts of their operations and how they can reduce potential harms—a required step toward securing a more formal annual license, which is mandated in the California Environmental Quality Act (CEQA).

The mandate to move all businesses from temporary licenses to formal ones was meant to occur in 2019, but the deadline has since been bumped (twice) to Jan. 1, 2022. Newsom is now pushing for that deadline to be extended another six months.

Although the proposed extension has drawn opposition from various environmental groups, the absence of an extension could result in several licensees falling out of the legal cannabis system, curtailing the state’s efforts to eradicate the illicit market.

As revealed by the 10-day sting operation in Los Angeles County, the environmental impacts associated with unregulated growers using banned pesticides, banned fertilizers and stolen water for their illegal crops can be far worse.

Below are comments from various stakeholders in the California cannabis industry regarding the $100-million grant program.

“The approval of the $100-million grant program to local governments is an attempt to reconcile one major flaw in the rollout of California’s regulated cannabis market. California required local governments to carry a huge burden in the adoption and licensing of regulated cannabis businesses without providing additional funding. The local governments were left to recoup those extra costs on their own, which in turn, increased the cost for the individuals seeking licenses. Many of the rural counties that are eligible to receive a relatively large portion of the $100-million grant program were already struggling for cash before having to take on the heavy lifting for cannabis licensing, such as Mendocino and Humboldt; which are eligible to receive $18 million and $18.6 million, respectively. I believe that the extra funding if used properly, will help those counties assist their legacy operators to comply with CEQA requirements and transition into annual licenses. However, the counties are running out of time to act regardless of how much money they receive, and approval of the trailer bill to extend the provisional licenses an additional six months would have a greater impact than the infusion of cash will have alone.” –Jared Schwass, Founder, Schwass Law Firm“The California regulatory schema has proven complicated and burdensome to an industry struggling to find its footing. The problem with grants is they often benefit larger companies who know how to get them; I can see very little of this money getting into the hands of small family farms. It’s these small family farms that struggle most with the more complicated compliance issues such as CEQA. I believe a lot of the environmental language in AUMA was there to preempt the environmental argument against legalization of an industry that had developed a reputation for environmental damage. In Northern California we have a group of farmers doing their best to come out of the shadows and comply with the law. If our goal is to prevent environmental damage, we should be supporting these farmers first.” –Michael Horner, CEO/Founder, Cannavia
“I think it’s great that the CA Legislature recognizes that there is work to be done. In this case I think they could have accomplished a lot more for the industry overall by lowering the CA state cannabis taxes. They are treating the symptoms rather than the underlying cause. Lowering taxes would help legal operators make ground against the illicit market which helps the whole industry progress. Lowering taxes would generate MORE tax revenue, not less, by allowing the state to levy the tax against a bigger piece of the market.” –Graham Farrar, President, Glass House
“Personally, I’m encouraged by this legislation since it has several promising features intended to ease the regulatory backlog, and because it shows a willingness on the part of policymakers to take proactive rather than merely reactive steps to move the industry forward. Regulatory uncertainty is a cloud that hangs over the head of many California operators, so anything that can help clear this air is welcome. That said, there are other regulatory and tax burdens on legal cannabis operators in California that go unaddressed by this legislation and that would arguably do more to move the industry forward.” -Sander C. Zagzebski, Member, Clark Hill Law Firm]]>