Joint Venture

If you think the push to legalize pot died last November, you must be high. Would over-the-counter weed really be the budget boon proponents promise?

The campaign to legalize marijuana in California, which is already being prepped for another ballot initiative in 2012 after going down in defeat last fall, could turn out to be a lot more trouble than it’s worth. I say this reluctantly because by all rights marijuana should be legalized. It’s gotten a bad rap over the last century for invariably leading to hard-core addiction and irresponsible behavior, even though you can run into many of the same issues by having too many drinks. But never mind the social and political considerations. The case for legalization these days is focused more on the potential economic benefits for California—specifically, a $14-billion-a-year industry that could generate hundreds of millions of dollars in taxes for state and local governments. Legitimizing the business might also help the overall economy by offering opportunities for growers, retailers, and even less obvious enterprises such as cannabis testing labs.

There is, however, a big problem: Making something legal isn’t the same as making it commercially viable—and I can tell you that no one has the foggiest idea of how that process would play out. “How do we set up marijuana? I don’t know,” says Rosalie Liccardo Pacula, codirector of the RAND Corporation’s Drug Policy Research Center in Santa Monica and coauthor of an extensive study on legalization. “As an economist, I can talk about broad brushes, but it’s going to be about the details.”

Legalizing marijuana for medicinal purposes hasn’t provided much of a template. In 1996, when California voters passed the Compassionate Use Act, there were no specifics on such basics as usage, distribution, quality control, and sales. It took another seven years for the state legislature to pass the Medical Marijuana Program Act, which, among other things, established a system of identification cards for people receiving cannabis and protected patients and caregivers from arrest. Five years later then-attorney general Jerry Brown issued a set of guidelines on the earlier rules that only raised more questions. Today the business is governed by a mishmash of state and local regulations that’s virtually impossible to figure out, much less enforce.

At L.A. city hall the confusion was illustrated this year by efforts to place a $50 tax on each $1,000 of gross receipts generated from medical marijuana sales. “We’re in desperate need of revenue, and we shouldn’t miss this opportunity,” Councilman Paul Koretz said of Measure M, a little-followed March ballot initiative. The motivation among several council members was understandable, but Measure M never made much sense as a revenue generator. First off, no one knows how big the local marijuana market really is, so it’s impossible to figure out how much tax revenue would be available (and good luck collecting taxes on cash sales). More problematic is the state law that requires medical marijuana to be grown by nonprofit collectives and cooperatives—and the fact that nonprofits are exempt from L.A. business taxes and fees. In other words, the council members want to tax a business that cannot be taxed. Well, sort of—marijuana transactions are still subject to a state sales tax, even though the Los Angeles City Attorney’s office considers the sale of medical cannabis to be illegal under any circumstances. Lawyers have been trying to untangle all this.

L.A.’s handling of medical marijuana has been muddled from the start, mainly because local officials ducked attempts early on at regulation and enforcement. That led to an influx of about 500 dispensaries, many of them exploiting the vagaries of the law—often quite openly. The council finally established a moratorium on new pot shops in 2007, followed by an ordinance three years later that the dispensaries have been challenging in the courts. Pressured to make adjustments, the council agreed on a lottery system in January to determine which 100 dispensaries would be allowed to keep operating (they must have opened on or before September 14, 2007). If the clampdown seems severe, consider that several municipalities in Southern California, including Pasadena and Glendale, have used zoning codes to ban dispensaries outright, and prosecutors in other communities are going after them on nuisance grounds.

Most folks don’t question the dispensing of medical marijuana per se: Polls show lopsided support for using cannabis to treat the side effects of chemotherapy and other serious conditions. But the business has exploded well beyond that, with many dispensaries offering weed to pretty much anyone who walks in the door. “There have always been some bad apples,” says Don Duncan, who operates a dispensary in West Hollywood and is cofounder of Americans for Safe Access, a local activist group. “Some people look at medical cannabis very opportunistically, figuring they’ll jump in and make a quick buck.” Duncan suspects that a third of the operators are legit, a third are connivers of one sort or another, and a third are somewhere in between.

JoAnna LaForce, who owns three dispensaries in L.A. and West Hollywood called the Farmacy, says that abiding by the rules has cost her a lot—first when the spurious dispensaries opened in L.A. and cut her business by a third and now with the lottery plan, which doesn’t differentiate between good and bad operators. “It is an industry of the future, for sure, but it’s not as easy as it looks,” LaForce tells me over coffee near her shop in Westwood. The Farmacy has the vibe of a small-town drugstore, with herbalists providing information about the types of marijuana available and assorted noncannabis products available for weight loss, insomnia, and chronic pain. “It’s been very, very stressful,” she says. “We keep thinking, What more can happen? And then something happens.”

It isn’t just inept local governments that are giving dispensary owners a rough time. The Internal Revenue Service has been denying deductions on the cost of expenses for marijuana, citing a section of the tax code that’s aimed at drug kingpins. Should that interpretation continue to be used, it’ll be a financial killer for the dispensaries that are barely hanging on. In addition, several major banks have stopped doing business with dispensaries out of fear they’ll be accused of aiding drug activity. “I was a client of Bank of America since college, so where else would I open my business accounts?” says Duncan. “Not only did they throw out my business accounts, but they threw out my personal accounts and they canceled my credit cards. No explanation.” Smaller banks are stepping in to provide financial services for the dispensaries, though there is always the possibility that they’ll cancel accounts as well. 


For all the chaos in the medical marijuana market, proponents of full-scale legalization are sounding optimistic that 2012 will be their year. Remarkably, they could be right: Proposition 19, the ballot initiative that would have legalized pot, lost by a closer-than-expected 53.5 percent-to-46.5 percent margin in November. Polling done by the Public Policy Institute of California shows a 49 percent-to-49 percent split on the general question of legalization. Those pushing for a new initiative are counting on the presidential election to draw large numbers of voters under 35, who would likely be supporters. “I do think there will be legalization in the next few years,” says San Francisco state assemblyman Tom Ammiano, who introduced legislation in 2009 that would have regulated marijuana in much the same way as alcohol.

Perhaps the biggest challenge for 2012 is galvanizing the divergent positions of marijuana advocates. Taxes are an obvious example. When Ammiano’s legislation was being considered in Sacramento, the Board of Equalization determined that a $50-per-ounce excise tax would generate around $1 billion in annual revenue for California plus $400 million in sales tax (an ounce of dope runs from $150 to $450). This would be a serious windfall for a state so badly in debt, and it was frequently cited in speeches supporting Proposition 19. No doubt the $1.4 billion will be touted again. Trouble is, almost everyone I spoke to said the estimate is ridiculously high. Placing such an excessive surcharge on pot would only prompt users to stay underground, which means much lower tax revenues. At the same time, keeping the tax too low would cut into any potential payout, what most voters see as the primary benefit of legalization. There is little agreement on what the right balance should be.

Opinions were all over the place at a recent conference in Berkeley sponsored by the California chapter of the National Organization for the Reform of Marijuana Laws. “God, this is complicated,” Ethan Nadelmann, executive director of the interest group Drug Policy Alliance, told a reporter (at one panel session participants even disagreed over when to have the question-and-answer period). “We need to change the way that marijuana consumers are perceived by the general public,” said Lindsay Robinson, a development officer at the Marijuana Policy Project. Robinson has firsthand experience: It took several months before she was able to tell her conservative parents that she had been hired by an organization that lobbies for the liberalization of marijuana laws.

Should a ballot initiative pass, there remains the overhang of federal drug laws. During last fall’s campaign, U.S. Attorney General Eric Holder announced that the Justice Department would go after anyone who sells, distributes, or grows pot, and the Obama administration shows no willingness to relax its drug stance (though the laws are not being actively enforced). That’s really the biggest hurdle: No one expects national legalization for many years, if ever. Even the liberal-minded Netherlands has not yet fully legalized marijuana, and if it doesn’t happen there, it’s not going to happen in Mississippi. Perhaps a kind of “don’t ask, don’t tell” coexistence can be established between federal and state officials, although that would require the cooperation of people like L.A. city attorney Carmen Trutanich, who maintains that sales of medical cannabis are illegal, no matter the circumstances. “There’s still a lot of solid opposition—from the police, from the Drug Enforcement Administration, from the treatment community,” says Jeffrey Miron, director of undergraduate studies at Harvard University’s Department of Economics and a longtime chronicler of the marijuana debate. “It’s pretty unlikely we’re going to see a radical change in the law.

As for the commercial possibilities, I wouldn’t get my hopes up. Philip Morris won’t be manufacturing Cambodian Reds anytime soon, and Ralphs won’t be carrying them, either. Just too much potential pushback. Certainly nice money can be made—a few well-positioned operators might do quite well—but there will be so many restrictions at the local level and so much saber rattling by the feds that selling marijuana will be relegated to a cottage industry, a little like the dispensary business and far from a sure thing. And as with any enterprise, heavy competition, limited financing, and poor decision making will sink many upstart entrepreneurs looking to make their fortunes. “People often call me and say they want to get into this business and ask what they should do,” says Duncan. “I tell them that there are safer and easier ways to make money than this.” Try wineries.

Photo-illustration by Kevin Van Aelst