It's been more than three months since sales of recreational cannabis were made legal in California. While the biggest effects of this emergent industry are still unknown, some are already being seen, and there's little question that more are coming.

Although Washington and Colorado may have been the first states to legalize pot, California is the one to watch, says Erick Eschker, Ph.D., professor and chair of economics at Humboldt State University and co-director of the Humboldt Institute for Interdisciplinary Marijuana Research (HIIMR), the first accredited U.S. academic cannabis research institute, founded in 2012.

"From a university point of view, this is an incredible opportunity for faculty researchers to be involved in a new field. Studying illicit substances isn't new, but what's new is the movement from being illegal to legal," Dr. Eschker says.

We spoke with Eschker and other faculty experts at the California State University to understand what we know so far about the effects of legalization on the state and what changes we might expect.

1. The road to regulation is still far from smooth.

To operate any kind of marijuana business (recreational or medicinal) in California, you need to get licensed — whether you're growing, manufacturing or selling.

Eschker and his HIIMR colleagues have spent the past year-and-a-half putting together economic impact reports on cannabis for the California Department of Public Health (CDPH), one of the three state agencies that regulates cannabis. In addition, Eschker has tracked the number of state licenses issued by the CDPH's Manufactured Cannabis Safety Branch (MCSB) since January 2018.

FROM A UNIVERSITY POINT OF VIEW, THIS IS AN INCREDIBLE OPPORTUNITY FOR FACULTY RESEARCHERS TO BE INVOLVED IN A NEW FIELD." 
— DR. ERICK ESCHKER, HUMBOLDT STATE 

As of April, the MCSB has issued more than 650 temporary licenses to manufacturers of recreational cannabis products.

"We're trying to get sense of the number of firms and their financials — how profitable they are, how many people they employ, what types of products they produce," Eschker explains, adding that with this data the state can, over the next couple of years, better understand the economic direction of the industry.  

In addition, more than 1,700 retail, distributor, micro-business and testing lab licenses have been issued by the Bureau of Cannabis Control, and more than 3,000 cultivation licenses have been issued by the California Department of Food and Agriculture.

"As economists, it's really interesting to see how the industry reacts," including the rate of regulatory compliance — meaning which firms get licensed and which ones remain unlicensed and therefore operating illegally, he says. 

In order to qualify for a state license, cannabis businesses must first get a license or permit from their city or county, but not all locales welcome these businesses. Although Senate Bill 94, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), makes adult-use recreational cannabis legal, it still gives cities the authority to regulate or ban commercial cultivation and recreational cannabis businesses within their borders.

A recent study conducted by the Southern California News Group tracked cannabis ordinances in all 540 of California's city and county jurisdictions and found that fewer than one in seven cities allow recreational cannabis stores, and it found similar roadblocks for cultivators and manufacturers.

Cannabis businesses operating without a license may be shut down by the state and face heavy fines. However, during these early days the state is focusing more on encouraging compliance than punishment, including offering temporary licenses without any fee.

"The idea is to get folks into the habit of the licensing procedure," Eschker says. "[State regulators] don't want to overtax and overburden people so that they decide to stay in the shadows."

Kenji Klein, Ph.D., assistant professor of management at CSU Long Beach, applauds the Bureau of Cannabis Control (BCC) and other state agencies for their efforts: "They had to create a working regulatory system for the world's largest cannabis market in just over one year, and they did it."

But, he adds, there's still a lot of work to be done.

2. Marijuana supplies could fall (for a while, anyway) after July 1.

Many existing California cannabis growers are reluctant to become regulated. According to a February 2018 report from the California Growers Association, a statewide advocacy group for cannabis cultivators and businesses, so far only about one percent of California's growers are licensed.

A lack of licensed growers could lead to a supply shock by July 1, 2018, when all cannabis sold in California must be from a licensed grower, says Dr. Klein.

"Licensed businesses can only work with other licensed businesses, and there is some fear among product manufacturers and retailers that they will not be able to find licensed growers to buy cannabis from," Klein says, adding that he's heard this concern from many SoCal cannabis businesses.

Manufacturers in particular may face a dilemma, he adds: risk losing their license by buying supply off the black market, or stop doing business altogether because they've run out of cannabis.

3.  The "grey market" will probably stick around.

"It's an open question whether the majority of cannabis businesses operating today have either the will or the capacity to meet state regulatory requirements and navigate the state licensing system," says Klein, whose dissertation examined the medical cannabis industry in California. Businesses that fall into this category are unlikely to just give up, he notes, so they'll operate in a grey area, or a so-called "grey market."

Over time, legal cannabis will undermine the black market of illegal sales of the drug, but the grey market may persist, he says.

The BCC recently told Weedmaps and other cannabis advertising platforms to stop allowing non-licensed businesses to advertise, Klein says. "We still don't know how this will play out, but the longer it takes the state to control non-licensed businesses, the longer the grey market will continue, and the longer it will be before we have a fully controlled and regulated cannabis market in California."   

4.  No one knows yet how much tax money the state will collect. 

Mark Washburn, Ph.D., associate professor of management at CSU Long Beach, puts sales of recreational cannabis sales in California at approximately $3 to $5 billion a year.  "So I roughly estimate state taxes — corporate and sales — from that will be around $1 billion annually," he says.

That said, it's still too early to tell what the revenue will be, exactly. "We'll get a better picture after cannabis businesses start to file their taxes with the state for the first quarter [of 2018]," says Klein.

When the money does come in, Klein believes it has the potential to do significant good. Senate Bill 94 includes provisions specifying how the money collected from taxing cannabis will be used each year, including:

  • $50 million for local government and community-based programs for substance abuse treatment and rehabilitation
  • $10 million for California public universities to conduct cannabis research
  • $3 million to the California Highway Patrol to determine how to detect and deal with impaired drivers 

"Much of the remaining tax money will go towards state youth education programs, drug abuse prevention, early intervention, school retention and so on," adds Klein.  

5.  The recreational marijuana industry is giving people jobs.

While it's also too soon for data on the number and types of positions being created from legal recreational marijuana, it's already clear that the industry is putting Californians to work.

"Legalization of recreational marijuana notably increased consumer demand, which means lots of new businesses at a variety of levels," says Dr. Washburn, who co-hosted a symposium last fall that included Long Beach city regulators, manufacturers and dispensaries.

The sector is exploding with new products offered at retail outlets, from cannabis concentrates for vaping and edible products to alcoholic beverages and Cannabidiol (CBD)-infused lotions. 

"Everything is getting more sophisticated and there are a growing number of related and supporting industries, like packaging, testing, labeling, legal services, consulting, and more," Klein says.

Bringing new cannabis products to market is "more complicated than just tossing the stuff into a Ziploc baggie or plastic pill bottle, so it requires more people, more diverse skill sets," he adds. Not only must companies create attractive packaging, they also need materials that will protect product quality and make it harder for children to get into.

6.  Cannabis businesses still aren't getting a warm reception from banks.

Because most banks are federally regulated and chartered, they won't knowingly do business with someone directly connected with cannabis. What's more, from the federal government's point of view, "cannabis is still a Schedule 1 drug, right up there with heroin," Eschker says.

"The banking service suppliers are skittish, and the [financial] arrangements [with cannabis businesses] are always tenuous and can be taken away at a moment's notice," notes Klein, adding that most such businesses therefore must work primarily with cash. Think cash-only paychecks and payroll taxes paid to the state in cash. And really good security systems to protect money that might otherwise be safely stowed in a bank's vault.

how do you safely collect a billion tax dollars in cash? having convoys of armored cars going up and down I-5 loaded with greenbacks is less than ideal." 
— DR. kENJI KLEIN, ASSISTANT PROFESSOR OF MANAGEMENT, 
CSU LONG BEACH

"Handling large quantities of cash is inherently risky, and it's also a huge problem for the state," continues Klein. "How do you safely collect a billion dollars in taxes in cash? Having convoys of armored cars going up and down I-5 loaded with greenbacks is less than ideal."

State-chartered banks, though, are not subject to federal restriction, so these institutions could accept deposits and manage the money of marijuana businesses without the risk of losing a federal charter.

California's Treasurer and Attorney General are looking into whether a state-owned bank is a viable solution, but that will take time to figure out, Klein explains. So, for now, cannabis remains a predominantly cash-based industry in California.

"That is a bottleneck," Eschker says. "If banking regulations loosened up, you could have a lot more non-cannabis money funding the growth of the industry." In addition to banking services, cannabis businesses could access bank loans.

7.   Federal policy may be changing in favor of legal cannabis.

Because pot remains illegal at the federal level, the Drug Enforcement Administration can still conduct raids of businesses that sell it at its own discretion.

However, on April 13, President Trump stated that he would support legislation that would protect legal cannabis states from a federal crackdown. This despite U.S. Attorney General Jeff Sessions' clear disdain for cannabis.

"Whether the president will follow through, and whether Congress will actually pass the legislation, is another question, but we may be on the verge of a very significant shift in federal policy," Klein says.

Meanwhile, back in California, businesses are continuing to pursue local and state licensing so they can open their doors and meet clear demand from consumers. A change in federal law, though, may clear the path for California and other states who have made, or will soon make, recreational marijuana legal.

While much about the impact of cannabis on the state is still murky, Klein says that at least the law that regulates recreational marijuana offers a road map to follow: "The state appears intent on fulfilling its legal obligation to implement that law. And as long as that is moving forward, people in this industry will move forward.

"Everyone believes regulated legal cannabis is inevitable here in California, and the industry is evolving very fast. Now is the chance to get in, and anyone who hesitates will get left behind." 

Learn more about the Humboldt Institute for Interdisciplinary Marijuana Research