The report from the Tax Working Group of the Dual Use of Cannabis Task Force estimates that the existing marijuana market in Hawaii is worth about $ 240 million per year, and a mature market could grow to about $ 354 million per year if recreational marijuana were legalized.
Considering that state tax collection now amounts to about $ 8 billion annually, the report notes that the potential revenue for the state government is “relatively modest compared to the state economy and overall tax collections.”
The report also warns that aggressively taxing legal marijuana suppliers early on could jeopardize the entire industry by encouraging consumers to continue buying cheaper products on what it describes as the “gray” market.
The report defines a “gray market” as enjoying “higher levels of social acceptance” and more ambiguous legal treatment than a clearly illegal black market.
Overall, the report argues that if Hawaii moves forward with legalization, it should avoid “heavy levels of regulation and taxation” so that the legal market can compete with the gray market distributors who now make the most sales.
The report comes as Hawaii’s eight legal medical marijuana dispensaries struggled to make a profit. Randy Gonce, executive director of the Hawaii Cannabis Industry Association, said only three of the dispensaries operating in Hawaii are breaking even and none have been able to pay a return on their investors’ money.
“On paper, they are not successful businesses,” which makes it difficult for operations to attract new capital, he said. “You are working on a very limited consumer base with heavy, heavy regulations. Your tax is really, really high, you can’t cancel your taxes… at the federal level – it’s just a tough industry to be in. ”
An obvious remedy is the enlargement of the legal market by allowing the recreational use of cannabis, and proponents foresee a major push next year for full-blown legalization.
Outgoing Hawaii Governor David Ige opposes recreational use, which has tended to dissuade state lawmakers from moving in that direction in recent years. The state Senate voted to legalize recreational marijuana last year, but the bill died in the House.
But that may soon change as Lt. Governor Josh Green, the Democratic candidate to replace Ige, supports the legalization of recreational marijuana. Former Lieutenant Governor James “Duke” Aiona, a Republican candidate for governor, opposes legalization for recreational use, but Green is the alleged favorite in heavily democratic Hawaii.
State Senator Chris Lee, who advocates legalization for recreational use, said the Tax Working Group’s new report offers the first coherent strategy it has seen for dealing with illegal sales, a problem that has plagued dispensaries in other states that have legalized recreational use.
Hawaii has a thriving illegal market for marijuana, and even aggressive law enforcement efforts have been unable to eliminate it. In fact, the task force report suggests that Hawaii’s gray or illegal marijuana market is so well developed that the state is already part of a national cannabis market.
“According to people in the industry, most of the illegal cannabis sold in Hawaii comes from California. California’s illegal cannabis is cheap and of relatively good quality, “according to the report.” This market dynamic will not go away even if Hawaii chooses to legalize adult use. ”
Meanwhile, the state has moved away from more punitive approaches to marijuana use in recent years. The legislator decriminalized the illegal possession of small quantities of marijuana in 2019.
The task force was created last year to explore developing a system with both medicinal and legal recreational uses – recreational use is already legal in 19 states plus Washington, DC and Guam – and the new report looks for ways in which authorities could oversee the industry “and end a culture of lawlessness”.
Gonce, who was a member of the team that produced the report, said Hawaii can learn from other states that have made licensing and legal market entry so difficult that gray market growers and distributors have decided to continue. to operate illegally.
“What we want to do is a very low barrier to entry, but still with some things to maintain the integrity of the company,” he said.
This includes audits to track cash flow, monitoring to make sure crops are from Hawaii, and government testing of the product for purity and potency, he said.
Dispensaries in Hawaii reported sales of approximately $ 50 million in 2021, but the report estimates that it represents only about 20 percent of statewide sales. The main reason for this is the price, with the product in dispensaries costing 40% to 100% more than what is available on the illegal market, according to the report.
According to the report, an ounce of “medium grade” marijuana on Oahu costs around $ 350, while the price is only $ 250 on the gray market. On the island of Hawaii, an ounce in a dispensary costs about $ 220, while the same amount of illegal marijuana costs about $ 150.
The report concludes that “problems related to the structure and regulation of the market result in high prices that are not competitive with the gray market. Laws and regulations that limit the scale, size of the market, competition and specialization create an unfavorable market structure. ”
The existing system also created what the report called an “oligopolistic market on each island”. Note that Kauai has only one dispensary and has the highest prices at around $ 400 an ounce.
The report also warned that recreational marijuana may require a hefty price tag at first, but experience from other states shows that the price drops dramatically as new producers enter the market. In Colorado, for example, the price of marijuana dropped from $ 2,000 per pound in 2015 to less than $ 1,000 in 2019.
The report also recommends that the state tax marijuana at a relatively low 5% rate to begin with, and gradually increase as recreational and medical markets mature.
“This strategy would allow the legal market to compete with the gray market on price early in the market’s development,” according to the report.
The report also advocates using “a strong independent cannabis agency” to oversee the development and operation of the Hawaii market rather than the state’s Department of Health.
Representative Ryan Yamane, who is chairman of the House Committee on Health, Human Services and Homelessness, said the report validates the notion that marijuana users are less interested in the source and quality of the product than in the price.
If the state approves recreational marijuana without changing the regulatory framework, “then that would only help the black market,” he said.
Among other issues, Yamane expressed concern that unregulated black or gray markets may distribute contaminated or intertwined cannabis with other drugs.
“If so, then we need to be aware of it as a community, that there will be benefits and consequences, and is the community prepared for that?” He said. “We must enter with our eyes wide open.”
Civil Beat health coverage is supported by the Atherton Family FoundationSwayne Family Fund of Hawaii Community Foundation, Cooke Foundation e Dad Ola Lokahi.