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In Hawaii, People Prefer Black Market Cannabis to State-Managed Facilities

Admittedly, since recreational cannabis remains illegal in Hawaii—with decriminalization only happening in 2019—such a high number isn’t very shocking. Still, those legally operating in Hawaii’s cannabis industry claim those numbers are only so high due to poor “market structure and regulation.”

The most popular reason that people use black market marijuana is because of high taxes. As the industry stands now, Hawaii’s cannabis market is worth about $240 million. It could reach $354 million if recreational cannabis legalization is approved, according to estimates.

However, the recent report states that such figures are small compared with the $8 billion per year in tax collection the state currently sees. Therefore, beyond the fact that there’s no financial incentive to raise taxes, there may be a legal incentive to lower taxes.

Some responders to the report believe that, if legalized, Hawaii should avoid “burdensome levels of regulation and taxation” in order to overshadow the state’s illicit market.

This issue of the black market likely transcends taxes. Only 8 dispensaries are legal in California. Each of these dispensaries have failed to generate a profit.

Randy Gonce (executive director, Hawaii Cannabis Industry Association), says that only three of these dispensaries have broken even. None of these dispensaries are returning investors.

Gonce continued: “On paper, they’re not successful businesses. You’re working on a very limited consumer base with heavy, heavy regulations. Your tax is really, really high, you can’t write your taxes off… at the federal level – it’s just a hard industry to be in.”

So, what can be done to get more people to turn to the state’s medical program?

Breaking Down Hawaii’s Medical Cannabis Program

While medical cannabis has been legal in Hawaii since 2000, it hasn’t progressed significantly in the last two decades.

Its list of eligible conditions, which only allows for 15 qualifying conditions to be prescribed marijuana, is one of its biggest problems. The severity of the conditions will play a significant role in whether or no doctor recommends marijuana for treatment.

But, access to cannabis is an even greater problem. Hawaii is home to just 35,000 licensed medical patients. These patients can only access the eight dispensaries located in Hawaii, and not on certain islands. Medical patients in Lanai and Molokai do not have direct access to medicinal cannabis.

These issues are topped off by the 4.5% General Excise Tax, (GET), which is attached to all cannabis products. This number may be lower in some parts of the nation, but it is still quite high. For example, in California, there’s a 15% excise tax on all retail cannabis products.

But since access to business licensing in California is more attainable, we’ve seen more farms growing products. In turn, this has driven down prices—allowing for an overall more affordable product for consumers.

In Hawaii, on the other hand, cultivation licenses start at a $75,000 fee—with a $50,000 renewal fee every year. Since the market has been around for some time and it’s obvious that there’s little profit within the industry, it’s a no-brainer not to invest in such ridiculous fees.

Hawaiians Import Cannabis Despite Lacking Production

So, how do you circumvent the problems of Hawaii’s medical industry?

One easy solution would be to legalize recreational marijuana in an effort to expand the customer base. This may be more complicated than you think. One, the Hawaiian vote is split almost 50-50 on this issue. The outgoing Governor. David Ige is against recreational use. This has kept lawmakers from discussing the subject in the past few years.

This issue will be addressed in significant ways in the coming years by those who vote in the midterms. Nominees for Lt. Governor Josh Green (D), supporting recreational legalization, and Lt. Governor. James “Duke” Aiona (R) opposing it.

Still, even if legalized, chances are Hawaii’s market will continue to struggle. And this is simply due to the fact that the state’s industry is lacking in terms of production. In fact, most of the cannabis in Hawaii isn’t even grown within the state—it’s being shipped in from California.

Despite this, Hawaii may not be able to address the issue of illicit markets because the source is located thousands of miles away.

As a task force report states: “Illicit California cannabis is cheap and of relatively good quality. This market dynamic will not go away even if Hawaii opts to legalize adult use.”

In order to combat the issue immediately, Hawaii’s law enforcement has become more aggressive in prosecuting illegal operations. But even such aggressiveness hasn’t been able to stop growth. As the task force reported, the illicit market has gotten so large that the state’s already a part of the national cannabis market.

Then, what can be done in Hawaii?

Hawaii has to create an equitable legal market to end the black market. As mentioned, the price of entry into the industry is ridiculously expensive—with capital investors even weary of such large financial incentives due to the lack of demand.

As Gonce says: “What we want to do is a very low barrier to entry, but still with certain things to keep the integrity of the business.” He furthered this by saying that groups should be monitored, cash flow should be tracked, and the government should be testing products for purity and potency.

However, these changes should only be implemented if they’re reducing prices for consumers. The legal price of Hawaiian cannabis currently is between 40% and 100% more than what’s available on the illegal market. An ounce of cannabis in dispensaries costs about $350, while it is $250 on the illegal market.

Production within the state has to rise in order to reduce prices. To increase the production of goods and services, it is essential that the state makes the market easier to use for all newcomers.

As the report indicates: “issues related to the market structure and regulation result in high prices that are uncompetitive relative to the gray [illicit] market. Laws and regulations that limit scale, market size, competition, and specialization create an unfavorable market structure.”