Could This Halt Marijuana's Expansion in Its Tracks?

By Sean Williams Markets Fool.com


Source: Flickr user Satish Krishnamurthy.

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Marijuana, the drug that even a decade ago was generally too taboo to talk about, has officially gone mainstream and is captivating the nation.

Marijuana is no longer a taboo topic
According to the most recent polls from national research firms Gallup, the Pew Research Center, and the General Social Survey, somewhere between 51% and 53% of respondents now favor across-the-board legalization of marijuana. Smaller studies that have been conducted in individual states have suggested that support for medical marijuana legalization is considerably higher (70%-plus in most studies).

Aside from representing a slice of freedom from the federal government's historically tight regulation of the illegal schedule 1 drug, access to marijuana for patients with chronic or terminal diseases has been a primary stimulus behind the marijuana movement's push.

Since 1996, when California passed the Compassionate Use Act and became the first state to establish a medical marijuana program whereby physicians could prescribe marijuana to patients for very specific medical conditions, the number of states where marijuana is medically legal has grown to just shy of two dozen. Within the past three years we've even witnessed four states (Washington, Colorado, Oregon, and Alaska) legalize the recreational use of marijuana for adults aged 21 and up.

But just as California led the charge for change, it could also be leading by example in the worst possible way when it comes to regulating the medical marijuana industry.

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California's "legal" dispensary issue
Based on a report published recently by NBC News, a majority of the medical marijuana dispensaries in and around Los Angeles city are likely illegal and operating without a license. A survey conducted by the University of California, Los Angeles and News21 suggests that "at least 75 percent of all the city's dispensaries... are in business illegally."

Source: Flickr user Dank Depot.

How did it come to this? The Compassionate Use Act gave physicians broad power to prescribe marijuana for medical purposes, but it set the onus of regulating the medical marijuana shops on the local governments within the state -- all 482 cities and 58 counties. This meant little chance of regulatory uniformity, and marijuana dispensaries knew this.

Some cities have banned the drug in its entirety within their city limits, while in other cities voters have mobilized to push dispensaries out entirely. In still other cities, though, dispensary numbers have exploded, and there seems to be little that residents can do about it.

Although the Los Angeles Police Department has made some headway in thwarting illegal dispensaries, the victory is likely to be short-lived. It's easy enough for a dispensary to close in one place and open up in another city within the state pretty quickly. Furthermore, California seems unwilling to apportion any additional funds to fighting marijuana when its police departments feel there are more serious crimes to think about.

The end result is medical dispensaries that are playing by the rules are at a financial disadvantage to illegal dispensaries since they have to pay annual licensing fees and other taxes associated with their legal status. California's government also loses out here, as it relies on licensing fees and taxable revenue to fill in some of the budget shortfalls within the state. Without uniform regulation of the industry across the vast state, enforcement is nearly impossible.

This could be a countrywide issue
Although California's problems are well-documented, it may not be alone in regard to its struggles to regulate the marijuana industry.

Source: U.S. Drug Enforcement Agency.

Colorado, one of the four states that's passed a law legalizing the sale of recreational marijuana to adults, has 321 jurisdictions within its state. However, a full 228 of those still fully ban both recreational and medical marijuana. Imagine trying to enforce marijuana regulations when you can drive five miles in one direction and find a complete ban on marijuana, while five miles in the other direction you might discover three or more legal dispensaries. In Colorado it's a real possibility, and it makes regulating the industry extremely difficult.

As a November 2014 report from online news source Vocativ and MSNBC demonstrated, consumers in Colorado are more than willing to turn to the black market to avoid paying the high price of legalized marijuana. Consumers' willingness to save what could be 60%-plus over legal dispensary pricing is exactly why illegal business owners, and those truly operating in the black market, are willing to risk being caught.

Why this matters
You might be wondering why this even matters in the first place. It pretty much boils down to three reasons.


Source: Pixabay.

First, if individual states can't demonstrate that they have the ability to regulate the marijuana industry, Congress may balk at the idea of legalizing or decriminalizing the drug. The lack of regulation in Los Angeles just adds more fuel to the fires of lawmakers who'd much rather wait for long-term data that suggests whether or not marijuana is safe for users and mature data that demonstrates that states and cities where it's legal haven't seen an increase in crime tied to the drugs' legalization.

Second, it disincentivizes legal marijuana businesses from opening or expanding if the local and state governments can't keep illegal operators out. Understandably, regulation is a costly venture that many states just don't have the capacity to budget in right now. Without tougher regulations, though, legal marijuana business will lose to black market operators in terms of nearly every financial metric.

Lastly, this is important because there are investors who view marijuana as something of a holy grail investment. There are publicly traded companies (mostly on the over-the-counter exchanges) that investors can purchase that are dependent on the health of legal dispensaries. If legal dispensaries are being undercut by black market operators, and there are few repercussions to doing so, it would potentially mean that marijuana-based businesses could struggle to thrive, or in some cases even survive.

I highly doubt this is the last we've heard about the struggle to regulate the marijuana industry in the nearly two-dozen medically legal states, but it does serve as just another of many reminders that investing in marijuana may come with far more risks than it's worth.

The article Could This Halt Marijuana's Expansion in Its Tracks? originally appeared on Fool.com.

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