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Local Bans in Legal States Spur Illicit Cannabis Sales

By providing access to dispensaries with safe and quality products, marijuana legalization could halt the illicit cannabis market in many states. However, some states where recreational or medical cannabis is legalized are not seeing the same effect, which may result from the opt-out policies in many local municipalities, Marijuana Moment reports.

A recent study conducted by Leafy and Whitney Economics analyzed the correlation between local opt-out policies and illegal cannabis sales. The results suggest states with minimal jurisdictional gaps, and where dispensaries are more prevalent, are the most successful at curbing the illegal market.

The report determined these results using the number of dispensaries per 100,000 residents. States with between 20 and 40 dispensaries per 100,000 residents are the most successful in eradicating illicit sales. Conversely, states with less than 10 dispensaries per 100,000 people make it significantly more difficult to obtain cannabis legally. As a result, only about 30-50 percent of sales happen through a licensed retailer.

States that adopted cannabis legalization early on, like Colorado, Oregon, and Alaska, implemented policies allowing more cannabis shops to open, making it easier for adults to obtain it legally.

When the analysis was conducted in July 2022, Colorado had 18 cannabis dispensaries per 100,000 residents. Results showed that nearly all cannabis sales in the state (about 99%) are completed at a licensed retailer. Oregon experienced similar results at 19 dispensaries per 100,000 residents, with about 75% of cannabis sales happening in the legal marketplace.

In contrast, California has only three stores per 100,000 residents, which recorded only 45% of the state’s total sales. This means that over 50% of cannabis sales in California still happen illegally.

Although California was one of the first states to legalize medical and recreational cannabis and is home to more than 1,000 dispensaries, local governments can still opt out of allowing dispensaries to open within their jurisdiction. As a result, more than half of the state’s rural counties and cities have opted out of allowing cannabis stories to open, allowing the illicit market to thrive in those areas.

In February 2022, California’s Department of Cannabis Control (DCC) released an interactive map showing the individual counties and municipalities where cannabis businesses are banned. According to the map, 44% of cities and counties allow at least one type of cannabis business to operate. In comparison, 56% of cities and counties prohibit a cannabis business of any kind from opening.

Governor Gavin Newsom also recently signed a bill to legalize cannabis delivery in parts of the state where dispensaries are prohibited. However, this is a minor fix to a more systemic issue.

“This report demonstrates that legal, regulated cannabis stores put illicit marijuana dealers out of business,” says Bruce Barcott, Senior Editor at Leafly and lead author of the report.

“Fears surrounding local cannabis stores may prompt elected officials to prohibit cannabis companies in their towns,” Barcott continued. “But adults in every community already purchase and enjoy cannabis, legal or not. The cities and counties that skip out on cannabis are voting to keep their local illegal marijuana markets in business.”

States that are just starting to break into the cannabis industry are experiencing their own challenges regarding the opt-out option. Despite overwhelming public approval in New York, hundreds of cities and villages elected to opt out earlier this year.

Although more than two-thirds of voters approved adult-use sales in New Jersey this April, less than one-third of the state’s municipalities allow cannabis sales. Many of the cities chose to opt out soon after legalization took effect. As a result, there are now 0.3 dispensaries per 100,000 people in the Garden State, allowing the illicit market to remain dominant over legal shops.

“It’s a combination of us trying to understand the new laws from the CRC (Cannabis Regulatory Committee) and also just the public education, what’s going on, where are we going to place these, what does it mean for the town, what do we do with the tax revenue, all those factors,” said Montclair Councilor-at-Large Peter Yacobellis at the opening of a new dispensary last month, according to NJ Spotlight News.

Lawmakers are also urged to play a role in deterring people from purchasing cannabis illegally. High state and local tax rates are also significant factors driving people to the elicit cannabis market. Since early on in legalization efforts, experts have said imposing excess taxes will drive people away from purchasing cannabis legally.

“Access and taxes, those are the keys to customer migration to the legal market,” Beau Whitney, founder of Whitney Economics and a co-author of the report, said. “And right now we’re seeing illegal cannabis sales propped up by opt-out cities and counties.”

In addition to encouraging the illicit sale of cannabis, cities where it is banned are likely to experience public health issues, lost revenue from tax options, and fewer job opportunities.

The report concludes, “Opting out isn’t a vote against marijuana — it is a vote in favor of illegal drug dealers.”

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