California is on the verge of creating a legal market for marijuana worth more than $5 billion that will help make the state a destination for pot-loving tourists, according to a new state-sponsored economic study.
But about 29% of all cannabis consumers may stay in the illegal market at first to avoid the cost of new regulations requiring the pot to be tested, tracked and taxed at 15% of its retail value, according to the study by the University of California Agricultural Issues Center.
State officials developing the regulations hope to gradually persuade the vast majority of cannabis users to go through the legal market, said Lori Ajax, director of the state Bureau of Marijuana Control, which hired the center to look at the economic impact of the new rules.
“It’s going to take some time,” Ajax said. “While it’s unlikely that everyone will come into the regulated market on Day One, we plan to continue working with stakeholders as we move forward to increase participation over time.”
The economic projections are both encouraging and daunting to state officials who hope to begin issuing licenses in January to thousands of businesses that will grow, transport, test and sell marijuana, following voter approval in November of an initiative legalizing recreational use.
The study indicates there will be economic benefits for the state from a regulated market.
The analysis estimated that as of November, aggregate annual sales in medical marijuana were $2 billion a year (about 25% of total marijuana sales) and sales in the illegal market were $5.7 billion (75%).
Voter approval of Proposition 64 has set in motion a system for fully legalized marijuana, which may bring state and local governments $1 billion in tax revenue, according to government estimates. The study estimated that more than 1,200 jobs will be created for testing and handling cannabis in the legal market.
New regulations allowing purchase of marijuana for recreational use are expected to shrink medical cannabis sales from $2 billion to $600 million as people are given an alternative to going through physicians to get medical pot cards for a fee, the study said.
“Revenues for medical cannabis in Washington State, for instance, fell by one-third in the first year after the legal adult-use cannabis system took effect, and by more subsequently,” the study said.
After the state adopts regulations, legal recreational use will make up 61.5% of the overall market, illegally purchased pot will make up about 29.5% of the market and legal medical marijuana use will be about 9% of the overall market, the analysis estimated.
“We projected that when legally allowed, slightly more than half of the demand currently in the illegal adult-use segment will quickly move to the legal adult-use segment to avoid the inconvenience, stigma, and legal risks of buying from an unlicensed seller,” the study says.
Californians should be concerned about the high rate of continued illegal activity, said Kevin Sabet, president of Smart Approaches to Marijuana, which opposes legalization of the drug.
“We have seen this in other states too, that the legal market is easily undercut by the well-established underground market,” Sabet said. “This is unsurprising. It is just one more unrealized promise from the marijuana industry.”
The study also said the legalization and regulation should boost California’s tourism industry as visitors pour in from states and countries that do not allow the sale and use of marijuana.
Currently, there are more than 260 million visits to California from people from out of state each year, and the visitors spend more than $122 billion in California, much of it on leisure goods and services, the study noted.
For example, tourists have been estimated to spend $7.2 billion a year on wine in California, the report said.
“Given that adult-use cannabis remains illegal in most other states, California’s legalized adult-use industry may attract some new visitors whose primary reason for visiting the state is cannabis tourism, as has been observed in Colorado,” the study said.
The report cited a survey by Strategic Marketing and Research Insights, commissioned by the Colorado Tourism Office in 2015, a year after that state legalized recreational use.
The survey of 3,250 tourists from Chicago, Dallas, Houston, San Diego and other cities found that 8% reported visiting a recreational-use cannabis store.
Of those, 85% said cannabis was a “primary motivator” of their visit to Colorado.
Hezekiah Allen, executive director of the California Growers Assn., agrees with the economic forecast that a boost in tourism will be one of the side benefits of marijuana legalization.
“Folks have been visiting California to enjoy the best cannabis in the world for many years,” Allen said. “It will be hugely beneficial to bring this existing commerce out of the shadows.”
But Sabet, the opponent of legalization, noted that some cities have taken steps to ban marijuana sales. They include Pasadena and Laguna Beach.
“I think you’re going to see a lot of cities opposing marijuana stores in their community precisely because they do not want the pot tourism that comes with them,” Sabet said. “The backlash is starting to happen in California.”