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Michigan's Legal Marijuana Market Will Be Uncompetitive With Illegal Dealers

J.D. Tuccille | 3.26.2019 12:01 AM

With medical marijuana approved by Michigan voters in 2008 and recreational use winning the nod at the polls this past November, the industry is up and booming in the wolverine state. Detroit residents, for example, enjoy the services of dozens of marijuana home-delivery businesses.

The businesses are technically unlicensed and illegal. Michigan's government has struggled with a huge backlog of applications for marijuana business licenses, and regulators drag their feet on creating the rules they plan to inflict on recreational sales. So entrepreneurs and their customers moved ahead without waiting for permission from lazy, obstructionist bureaucrats. The black market is how you get things done when government gets in the way.

Things will improve only if Michigan politicians and regulators learn from experience elsewhere. California, Colorado, Oregon, and Washington led the way on legalized marijuana, and all found early on that intrusive regulations, high taxes, and obstructionist bureaucracy have much the same effect as outright prohibition.

California is pulling in just half of projected marijuana tax revenue after its first year of recreational sales. "California imposed what's arguably the highest aggregate tax on legal cannabis in the country…In total, this can add up to as much as a 45% tax on the consumer," The Motley Fool reported last month. "It's pretty evident that this tax is thwarting the move of consumers into legal channels, and state legislators know it." The publication added, "Another issue has been regulatory red tape within the Golden State…California has contended with a slow dispensary license approval process."

At the end of 2015, Washington's own Liquor and Cannabis Board conceded that, three years after voters had legalized the stuff, "the state's marijuana market is divided roughly into thirds for medical, recreational and illicit use." Despite having access to legal marijuana, many customers continued to risk going to illegal dealers who offered more competitive products, prices, and services. Admitting the uncompetitive nature of the highly regulated legal market, Seattle officials unsuccessfully pushed for legalized delivery after running into a proliferation of the sort of illegal-but-popular services currently servicing Michigan.

Just two weeks ago, Massachusetts regulators heard pleas for less red tape and increased pricing flexibility to keep the newly legal market there responsive and viable.

Not everybody learns, of course. Last year, Oregon slashed the amount that medical marijuana cardholders could purchase at a time from 24 ounces to one ounce. The move was intended to prevent the diversion of legal supplies to the black market, but it's a fair bet that it helped fuel a surge in the state's vibrant illegal growing operations.

"The experience in other states shows Michigan should not try to regulate every piece of minutiae in the still infant, rapidly developing cannabis industry," Geoffrey Lawrence of the Reason Foundation (which publishes Reason magazine) cautioned after voters approved recreational pot. "Instead, lawmakers should focus on creating a basic framework that supports a legal cannabis market that is safe, flexible and customer-friendly enough that licensed marijuana businesses are able to compete with and replace black market sellers."

Maybe some Michigan officials are paying attention. Just weeks ago, Gov. Gretchen Whitmer issued an executive order abolishing the struggling medical marijuana licensing board and replacing it with a new agency. "The action comes as the volunteer board has struggled to consider license applications in a timely manner, effectively stalling a fully viable medical marijuana market at a time when the much bigger recreational weed business is just around the corner," reported the Detroit Free Press.

The Michigan Cannabis Industry Association applauded, criticizing the old regulatory body for "its slow rate of license approvals and what many say were inconsistent and unfounded denials, resulting in a shortage of legal and safe products for Michigan medical marijuana patients." The Detroit News editorial board agreed (although it has reservations about the use of an executive order), complaining that "the Licensing Board was woefully inefficient at granting licenses and crafting rules to fulfill the Michigan's demands for legal marijuana."

Unfortunately, the transition from the old regulatory board to the new board doesn't occur until April 30, and roughly 50 marijuana businesses that never received licenses are likely to receive state orders to close on March 31.

Keep in mind that the state knows who and where those doomed dealers are only because they tried to do things legally. Those applicants facing the destruction of their businesses may well be sorry they ever trusted to a "legal" market that's subject to slow, expensive, and arbitrary rule-making. Does anybody doubt that many people contemplating entering the legal marijuana business in Michigan—and in other jurisdictions similarly sabotaging the industry with bureaucracy, red tape, and taxes—are watching the mayhem and thinking that they are much better off keeping their operations illegal?

Marijuana dealers thrived under prohibition (I should know—I was one) when the law explicitly sought to prevent their transactions with willing customers. Clumsy taxes and regulations aren't going to do anything but drive buyers and sellers back to the flexible and responsive underground market that served so well in the past.

If politicians and regulators want marijuana dealers and their customers to operate legally, they must make the legal market an attractive alternative to the tried and true black market. That requires them to get out of the way and stay there.

If politicians and bureaucrats don't refrain from intervening in transactions between marijuana sellers and buyers, if they can't keep themselves from making the trade unnecessarily expensive and unresponsive, business will carry on without their permission or approval. Just ask those delivery services in Detroit.

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