More than three-quarters of California’s local governments have declined to authorize retail stores to sell cannabis, as permitted by state voters with their 2016 approval of Proposition 64. Opposition has been led by moderate Democrats and conservative Republicans unconvinced that making the drug readily available for recreational use is good for society.

But much of California’s House delegation is supportive of helping the marijuana industry achieve a key goal: access to the banking system. Even with cannabis now legal in some form in 33 states, the great majority of banks and credit unions in the Golden State and elsewhere have declined to do business with marijuana-related businesses because possession and sale of the drug remain illegal under federal law.

Last week, the House passed the Secure and Fair Enforcement Banking Act 321 to 103. Every California Democrat backed the measure and so did four of the state’s seven Republican members: Majority Leader Kevin McCarthy of Bakersfield, Tom McClintock of Elk Grove, Devin Nunes of Tulare and Duncan Hunter of Alpine.

The passage of the bill after past efforts went nowhere was widely credited to a change in focus in lobbying. Leading the push this time was lobbyists for the financial services industry itself – not the cannabis industry. They argued that making a multibillion-dollar industry use cash only created headaches and safety risks for the many legitimate, longstanding businesses that dealt with cannabis companies.

Bankers say other businesses shouldn’t be inconvenienced

American Bankers Association President and CEO Rob Nichols told Politico, “The most compelling arguments have been centered around these secondary relationships. It’s the local plumber, it’s the local electrician, it’s the attorney, it’s the accountant who are doing business with a cannabis grower or dispensary who are then having challenges associated with getting banking products and services.”

The American Financial Services Association focused its lobbying on McCarthy and Speaker Nancy Pelosi, D-San Francisco, also emphasizing the need to stop inconveniencing so many established businesses.

The fate of the SAFE bill in the Senate is unclear. Senate Banking Committee Chairman Mike Crapo, R-Idaho, has said that he will schedule a hearing on the bill, but his aides said that should not be interpreted as support.

California’s Democratic senators, Dianne Feinstein and Kamala Harris, are expected to be supportive. After 35 years as a staunch supporter of the drug war, Feinstein reversed course in spring 2018.

“My state has legalized marijuana for personal use, and as California continues to implement this law, we need to ensure we have strong safety rules to prevent impaired driving and youth access, similar to other public health issues like alcohol,” she told a McClatchy reporter.

Harris has also changed her position. In 2010, while running for California attorney general, she opposed an initiative to legalize recreational marijuana use. 

“Spending two decades in courtrooms, Harris believes that drug selling harms communities,” her aide told Capitol Weekly. “Harris supports the legal use of medicinal marijuana but does not support anything beyond that.”

But her position softened over the years, and last year she signed on as a co-sponsor of a bill by Sen. Cory Booker, D-New Jersey, that would make cannabis legal under federal law.

Irvine-based Weedmaps – the very popular website that guides cannabis fans to stores – recently announced it would stop listing illegal retailers later this year. The decision is a rare dose of good news for the legal marijuana industry in California.

The Weedmaps site features information on the products offered by hundreds of sellers in the Golden State, details on the special sales they are offering, information on different products and consumer reviews of dispensaries and their inventories. It is considered such a key part of the marijuana scene in California that one legal seller told the Los Angeles Times that its decision to not list illegal stores would wipe out 80 percent of them.

The Newsom administration has been pressuring Weedmaps for months to stop listing illegal stores, which far outnumber legal stores in the Golden State. Because they don’t pay taxes – and don’t cover expensive safety packaging and product testing – illegal shops can have a price advantage of 40 percent or more on legal dispensaries.

Legal shops decried unfair competition

After Proposition 64 passed in 2016 – legalizing the sale of recreational marijuana in California as of Jan. 1, 2018 – the legal cannabis industry’s initial complaints were about the slowness of the state in providing permits to pot shops and about the refusal of three-quarters of cities and counties to authorize such shops.

But as 2018 unfolded, the focus of complaints shifted to what legal stores saw as deeply unfair competition from illegal stores. As CalWatchdog reported, state officials announced in February that only $345.2 million was generated in revenue from sales, excise and cultivation taxes in 2018 – about a third of what was expected. This led the state’s Cannabis Advisory Committee to blast the “fragmented and uncoordinated” law enforcement response to illegal cannabis sales.

This and other complaints led Gov. Gavin Newsom to seek and receive an increase of at least 74 percent in enforcement funding in the 2019-20 state budget, which will allow the state to add more than 200 new enforcement and compliance positions by July 2020.

The legal industry in recent months has been heartened by efforts in Los Angeles to target illegal dispensaries by turning off their utilities and citing not just shop owners and employees but landlords. There have also been raids in Mendocino, Sonoma, Siskiyou, Trinity and Riverside counties that seized nearly 300,000 marijuana plants being grown without a license. Authorities also seized 20 tons of cannabis in June in Santa Barbara County, which has unexpectedly emerged as a major growing area since Proposition 64’s passage.

Analyst: Illegal shops’ market share growing

But the good news was followed by a report this month from BDS Analytics, which tracks cannabis sales data, that illegal stores appeared to be increasing their market share in California. As of June, state residents were buying three times more marijuana from illegal stores than legal ones.

Industry experts say illegal shops don’t just have a pricing advantage. Since many emerged after California voters approved the sale of marijuana for medicinal purposes in 1996, they had a 20-year head start on legal sellers in establishing relationships with growers and building customer bases.

But Newsom, for one, never expected a smooth start to the legal California cannabis industry. In 2016, while campaigning for Proposition 64, he said he believed it would take the industry “five to seven years” to hit its stride after legal sales began.

State officials, from Gov. Gavin Newsom on down, have been sympathetic to the struggles of California’s legal marijuana industry since recreational sales at shops became legal Jan. 1, 2018, so long as local governments gave their OK.

This sympathy was on display in recent weeks as the Legislature finalized work on the 2019-20 state budget. It includes provisions that will allow marijuana growers and sellers to operate with provisional permits for up to five years.

As of mid-June, state officials reported only 39 cannabis retail store had received regular licenses, while more than 2,700 were operating with temporary or provisional permits. The state’s record was somewhat better with growers – 208 had regular licenses versus the 1,500-plus who had provisional permits.

But while marijuana lobbyists welcome the regulatory relief, there is growing frustration over why it is needed: the slowness of the state to process store and grower licenses. One state agency acknowledges it has 60 vacancies in the unit that reviews grower permit applications.

Illegal sellers actually increasing market share

The frustration is even more acute over the failure of state and local authorities to crack down on the illegal sellers and growers who are able to charge at least 20 percent less than those operating legally. That’s because they don’t have to pay taxes or for licenses, pot testing and child-proof packaging. A report last week from BDS Analytics and Arcview Market said that illegal sellers had such an advantage that they were actually gaining market share in California, making it likely that state forecasts of tax revenue from legal sales will continue to fall short of state predictions.

The Newsom administration is aware of concerns from legal sellers and recently launched a #WeedWise public information campaign to urge the public to only use legal outlets. The Associated Press reported Friday that the state also has begun a crackdown on illegal growers, albeit one that’s starting with relatively few resources.

A crackdown launched earlier in Los Angeles has not yielded nearly as much progress as either city officials or legal cannabis sellers hoped. A May 29 report in the Los Angeles Times found that even though city officials had done better than most in streamlining the application process for legal stores – allowing 182 to open – there were even more illegal dispensaries open selling cheaper products.

A police union official told the newspaper that since Proposition 64 was enacted in 2016, clearing the way for recreational sales, using the LAPD’s limited resources to crack down on illegal sales had been a low priority for the department.

But the Times reported that the L.A. City Attorney’s Office has been more aggressive in recent months, including targeting the landlords who rent store space to illegal dispensaries with fines and threats of escalating penalties.

While pot shop owners can be hidden behind corporate filings and thus be tough to hold accountable, landlords can be determined quickly through property tax records.

San Diego crackdown successfully focused on landlords

San Diego officials began a landlord-oriented crackdown on illegal pot stores in spring 2016. Some 20 months later, police said they continued to struggle to shut down illegal delivery services operating in the city, but that illegal storefront sales were no longer a problem.

Meanwhile, the state that pioneered approval of recreational marijuana use – Colorado – is bragging about how well its program has done. In 2018, the state took in tax revenue of $267 million on marijuana sales. It has a population of 5.7 million.

In 2018, California took in tax revenue of $345 million on marijuana sales. It has a population of 39.6 million – just under seven times larger than Colorado. That means Colorado took in more than five times as much in cannabis taxes per capita than the Golden State.