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Monday, June 21, 2021

California’s $100 Million Marijuana Bailout Tells You All You Need to Know about Its Government

California’s legislature recently approved a $100-million plan to boost the Golden State's struggling legal marijuana industry, which is floundering under an oppressive tax and regulatory climate.

Image Credit: FEE composite-CC SA 2.0

There are many great movies on the drug trade, but my personal favorite is Blow. The film stars Johnny Depp as George Jung (aka Boston George), a real-life drug smuggler who was sentenced to 70 years in prison in 1994.

Like most drug movies, Blow depicts the highs of the drug trade—parties, mansions, and rooms full of cash—as well as the lows: addiction, paranoia, and a loss of control. One thing that made Blow so good is it showed the incredible demand for drugs.

Whether they are dealing pot or cocaine, George and his partners can’t keep up with the huge demand no matter how much supply they get.

“I think it’s fair to say you underestimated the market,” George tells his business partner, Derek Foreal (Paul Reubens), 36 hours after moving a huge amount of product he said it would “take a year to sell.”

80% Still Not Licensed

I bring up Blow in light of news that California’s legislature approved a $100-million plan to boost California’s struggling legal marijuana industry.

As the Los Angeles Times reports, the industry is in serious trouble. The growth of licensed cannabis shops has been dismal and far below state projections. Just 1,086 retail and delivery firms have been permitted to date—about 82 percent lower than the 6,000 cannabis shops the government anticipated.

How is this possible? Well, shortly after California legalized pot in 2016, lawmakers began burdening the industry with so many regulations—particularly myriad compliance orders associated with the California Environmental Quality Act (CEQA)—that businesses are drowning under paperwork, fees, and delays.

“Many cannabis growers, retailers and manufacturers have struggled to make the transition from a provisional, temporary license to a permanent one renewed on an annual basis — a process that requires a costly, complicated and time-consuming review of the negative environmental effects involved in a business and a plan for reducing those harms,” the Times reports.

“It is a significant amount of money, but I don’t know that it actually answers the problem,” a marijuana trade leader said of the $100 million plan to boost California’s struggling pot industry.

With more than 80 percent of firms in the marijuana industry not fully licensed, one might think California lawmakers would be examining the regulatory framework that is strangling the industry. This is not what’s happening, however.

Instead, Gov. Gavin Newsom is trying to give marijuana businesses a six-month extension on the Jan. 1 deadline to transition from provisional licenses to full-time licensed shops. (This extension is being vigorously opposed by environmental groups.)

Additionally, the state is shelling out $100 million to help businesses navigate its regulatory labyrinth. Assemblyman Phil Ting (D-San Francisco), the chairman of the Assembly Budget Committee, told the Times “the funds, including $22 million earmarked for L.A., would help cities hire experts and staff to assist businesses in completing the environmental studies and transitioning the licenses to ‘help legitimate businesses succeed.’”

Cannabis industry trade leaders say this isn’t the kind of relief they need, however.

“It is a significant amount of money, but I don’t know that it actually answers the problem of provisional licenses making it through CEQA analysis in a timely manner to get an annual license,” Jerred Kiloh, president of the United Cannabis Business Assn., told the paper. “The real problem is CEQA analysis is a very arduous process. I think it would be good to have more reform of the licensing system instead of just putting money to it.”

‘If It Stops Moving, Subsidize It’

Though marijuana was illegal almost everywhere in the world just a few short years ago, the global market is projected to hit $90 billion by 2026. The reason for this is obvious: there is a huge demand for cannabis, which can be used recreationally, medically, and generally (it supplies various other needs).

This is why Californians were so excited about marijuana legalization. Just a few years ago, officials were projecting it to be a $5 billion boon to the economy, and politicians were licking their chops at the prospect of $1 billion in new tax revenue for state and local governments, as the legal cannabis market slowly replaced the illicit market.

This didn’t happen, however. A recent USC study estimated that the number of illegal sales still outnumber the number of legal onces.

“The finding that a larger than expected number of unlicensed facilities are in areas that allow retail suggests that unlicensed retailers are competing with licensed retailers, potentially undercutting the sales of the licensed retailers and reducing the taxes paid to the state,” researchers said.

This, sadly, is the modus operandi of the Golden State, where an oppressive tax and regulatory climate has created widespread economic dysfunction. Despite its wealth—with a GDP just under $3 trillion, California has the fifth largest economy in the world—the state has the third highest homeless rate of the 50 states, persistently high housing prices, and leads the nation in poverty rate relatively consistently. (This is not to mention the, er, pooping and shoplifting epidemics.)

As one Twitter influencer observed, the only thing you really need to know about how the Golden State is governed is that lawmakers had to create a $100 million bailout for marijuana, a product in such high demand that the government couldn’t stop it from being traded for decades, despite waging a “War on Drugs.”

California’s effort to save its floundering cannabis industry brings to mind an adage from Ronald Reagan (himself a major proponent of the War on Drugs) on the misguided (and sometimes comical) efforts to regulate the economy.

“Government’s view of the economy could be summed up in a few short phrases,” Reagan once quipped. “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

As ridiculous as this sounds, this is precisely what California has done.

What California Could Learn From ‘Boston George’

According to a 1993 Boston Globe article, “Boston” George Jung (who died in May) was making nearly $2 million a month (inflation adjusted dollars) selling pot before his 1974 arrest in Chicago, when he was busted smuggling 600 pounds of pot. Jung himself estimates he made about $500 million (2020 dollars) selling drugs in his lifetime. 

Say what you will about Jung—a man who dealt with Pablo Escobar and traded in controlled substances—but at least he knew how to make a profit.

That’s something you can’t say about California lawmakers.

  • Jonathan Miltimore is the Senior Creative Strategist of at the Foundation for Economic Education.