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Future Legal Cannabis States Can Learn from California's Mistakes

The Golden State has made its fair share of marijuana industry missteps, laying a clear road map of what not to do.

Opinions expressed by Entrepreneur contributors are their own.

Legal cannabis continues to become a new reality in states throughout the U.S., giving lawmakers the unique challenge of installing a regulatory system on newly established marijuana markets. 

Alexander Spatari | Getty Images

California is largely seen as the leader of the cannabis industry (both legal and illegal) due to the state industry’s size, experience, and innovative spirit. But the growing pains experienced by California’s legal cannabis market in its first four years offers essential lessons to states that are actively setting up their cannabis programs for the first time. 

Here are some issues newly legal states should tackle to ensure a smooth transition. 

Related: Everything You Need to Know About the Five New Cannabis Markets

1. Combat the black market

Long before voters in the state-approved Proposition 64 in 2016, California had an active, but illegal, recreational cannabis market. The state’s vibrant black market and loosely regulated medical marijuana program offered easy access to cannabis with few barriers. 

Illegal cannabis cultivation is equally dug in around parts of California, supplying the state and much of the country with illicit marijuana. 

The legalization of medical marijuana came to a head last decade when inconsistent marijuana laws and a lack of thorough enforcement allowed a booming grey market of unlicensed growers, manufacturers, and dispensaries to take hold throughout the state. 

A vibrant marijuana black market cuts into state tax revenue, increases safety risks for consumers, and makes it unnecessarily difficult for compliant businesses to succeed due to uneven competition. California’s first major hurdle was (and continues to be) putting in place a legal system that can rival the illegal market's low cost and convenience. 

Similarly, taking on the black market will be a central concern of all new markets looking to secure future success. The tough lessons learned in California, where the black market is expansive and well established, can be applied to new legal cannabis markets around the country. 

2. Make the transition easy.

California has been criticized for maintaining an incredibly high cost-of-entry into their legal cannabis industry. Licensing and application fees impede many smaller businesses, including those owned by minorities or women and those already functioning in the medical market. These high fees all but guarantee that only the best-funded companies can break into the industry. 

With such a high bar for entry, many cannabis businesses (especially those already functioning in the black market) find it more cost-effective to operate illegally. Setting reasonable application and licensing fees would create a more diverse and dynamic cannabis industry, inviting innovative companies to drive new creative products and services. 

Adding programs that make it easy for existing medical marijuana businesses to move into the recreational industry will prevent these companies from moving into the illegal market and its “greener” pastures free of fees. Increased competition also keeps the legal industry fresh and the prices accessible, which benefits consumers and encourages their use of the legal market. 

3. Pass a reasonable cannabis tax code

California’s legal cannabis program also has exceptionally high taxes, levied at all levels from cultivation to retail sales. Ultimately, these increased costs in the production chain are added to the price, which can lead to a 40 percent markup in some dispensaries.

When legal cannabis products become too expensive, consumers are more likely to turn to the established black market where these extra costs don't burden products. This loss of revenue will impact cannabis businesses, potentially tempting them to the illegal market as well. 

Simply put, if the legal market cannot keep up with the lower prices offered by the black market, it will be difficult to move consumers to the legal market and keep them there. 

4. Beef up your regulation system

A central goal of legalizing cannabis is to create a controlled system that provides safe and reliable cannabis products for consumers. The recent vaping health crisis drove home the need for tested cannabis products to ensure public safety. California got this right by enacting some of the strictest consumer safety protections, including comprehensive lab testing by licensed laboratories, to protect consumers

Unfortunately, the safety regulations have put a strain on existing third-party labs. This soaring demand has artificially increased the cost of the already expensive lab testing and has enticed unqualified, and even unscrupulous, players into this sector of the industry. In this aspect, California’s legal cannabis industry fell short and is still struggling to catch up. Cannabis regulators are woefully understaffed. This has created an uneven playing field where quality labs are being undercut by inferior operations. 

Current lab testing standards are being set at high levels by industry leaders to get ahead of any regulation that may be imposed on the federal level if cannabis is legalized. Some black market growers intentionally lace their crops with psychedelic compounds for added effect. Labs in California are testing for these items, prohibiting them to enter the legal market. Other states should make sure to follow similar testing guidelines until we have federal standards.

Newer cannabis markets looking to meet California’s safety standards need to work early in the process to license enough labs to avoid a bottleneck in their supply chain and to hire enough auditors to ensure these labs are functioning correctly. 

5. Enforce compliance and legal considerations

Of course, all these lessons fall flat if the state doesn't regulate and enforce cannabis laws. The unrestricted black market will continue to exist well into legalization, sabotaging the legal market before it has had the opportunity to take hold.  

Proper regulation of licensing and compliance will keep the cannabis industry operating as intended. Enforcement against illegal operations, including illicit grows and dispensaries, will remove these options from consumers and encourage the legal market's patronage.

Related: Four Years After Legalization, California Has Had Unexpected (and Often Disappointing) Results

Consumer safety, regulation of the cannabis supply line, moving consumers and businesses into the legal market: careful management of each of these factors is critical for any nascent legal cannabis market's ultimate success. 

For each of these, the established black market will be the biggest challenge to overcome. Any legal cannabis market hoping to succeed will need to develop a more appealing program to both consumers and businesses than the illegal alternative. Only then can these burgeoning new markets follow.