Prop 64: Will California voters turn the Golden State green? | Crain's Los Angeles

Prop 64: Will California voters turn the Golden State green?

Of all the arguments for legalization of recreational marijuana in California, the one cited most by supporters amounts to 10 figures: $1 billion.

That’s how much tax revenue the California Legislative Analyst’s Office projects that Proposition 64 could generate each year if voters give it a thumbs-up at the ballot box on Nov. 8. Tens of millions more would be saved annually by reduced criminal justice costs, according to estimates.

“It’s long overdue,” said Dr. Larry Bedard, a member of the Marin Healthcare District board and a major proponent of Prop. 64. “There are a lot of misconceptions about marijuana use. People have a lot to gain from this legislation once they carefully consider it.”  

Opponents of the Adult Use of Marijuana Act (AUMA) include growers and operators of small dispensaries that supply the product to those with health issues. If there’s $1 billion to be made from Prop. 64, the little guys doubt they’ll see much of it.

“AUMA is very poorly thought-out legislation,” said Steve Dodge, CEO of the Humboldt Growers Collective, a Humboldt County-based vendor of cannabis products. “It smacks of big money and big corporations attempting to set the law up to benefit them and, in the end, not the small farmer.”

Recent polls from USC Dornsife/Los Angeles Times, CBS and the University of California at Berkeley show double-digit leads for Prop. 64 supporters. In each case, at least half of all persons surveyed said they planned to vote "yes," while another 5 percent to 10 percent were undecided. That doesn’t leave a lot of hope for the opposition.

Numbers and sense

According to the state legislative analyst’s office, Proposition 64, if approved, would:

  • Allow people age 21 and older to grow six out-of-public-sight pot plants at home, and possess up to one ounce of marijuana and up to eight grams of concentrated marijuana (a.k.a. “hash”), for non-medicinal purposes. The weed may be used by the grower, or given away to anyone age 21 or older. The marijuana must be smoked or consumed at home or at a business licensed for such activity, and it may not be present at schools, day centers or youth centers when children are nearby.
  • Require all non-medical marijuana regulation to be overseen by the Bureau of Marijuana Control. Certain state agencies will regulate and license certain parts of the marijuana industry. Each agency may charge a fee to cover operating costs. Individual cities and counties may also regulate non-medical marijuana businesses, including the banning of such businesses entirely.  
  • Impose a 15 percent excise tax and a cultivation tax of up to $9.25 per ounce of plant grown. It would also allow existing and new sales taxes by local entities. The taxes would apply to all types of marijuana sales. Tax rates can be adjusted for inflation after 2020.
  • Allot $25 million to $65 million of annual tax revenues to studies on the health benefits and risks of marijuana use, and to establish substance abuse treatment centers in hard-hit areas.
  • Allocate any remaining tax revenue to youth education programs, environmental cleanup from illegally grown marijuana, programs to reduce driving under the influence of marijuana, alcohol or other drugs, and a program to resolve any adverse impact on public health and safety that may occur due to the legislation.
  • Change – usually, reduce – penalties for most marijuana-related crimes, present and future.

If Prop. 64 passes, the state legislative analyst’s office believes revenue will be significantly lower than expected during the first few years. During that time, as the state issues licenses to businesses and they set up production and distribution systems, market prices are likely to fall.

“As this occurs, more consumers will begin purchasing marijuana legally,” according to the legislative analyst's report. “It is unknown precisely how long this process will take, but it could be several years after the measure passes before revenues reach [expected totals].”

Up in arms or up in smoke?

Marijuana regulation in California is not a new thing. In 1996, voters approved Proposition 215, the Compassionate Use Act, which allows the use of the plant by anyone with a demonstrated medical need.

Legalized medical marijuana cooperatives – nonprofits that grow and provide weed to their members – were authorized by state lawmakers in 2003. Medical marijuana sales were taxed by state and local governments, which generated tens of millions of dollars in revenue, according to the state. 

Recreational marijuana use remained illegal for the next 20 years, despite an attempt in 2010 to change that. Proposition 19, the Marijuana Legalization Initiative, was rejected by almost 54 percent of voters. At the time, analysts said the public wasn’t comfortable with the legislation’s regulatory standards, which were left to individual cities and counties.

Fast-forward six years, and public sentiment has shifted. Some of that stems from people seeing examples of programs in other states. Colorado and Washington legalized recreational marijuana use in 2012, followed by Oregon and Alaska in 2014.

In particular, Colorado has been a poster child for what California might experience. That state’s medical and recreational marijuana sales hit $538 million during the first half of 2015. One year later, sales for the same period totaled $724 million, according to the marijuana news website Herb. In mid-October, marijuana sold for almost $1,500 a pound, slightly less than the going rate in California, according to a weekly market price report by Cannabis Benchmarks/New Leaf Data Services.

But California’s market is significantly larger. The state’s medical marijuana industry alone is expected to be worth $2.7 billion in 2016, according to Fortune. On its own, the number will rise to $4 billion by 2020; it will top $6.6 billion if the Adult Use of Marijuana Act is factored in.

The campaign

There’s also a question of resources in the lead-up to Election Day.

As of mid-October, Yes on 64 backers have raised more than $18 million, about nine times more money than Prop. 64’s opposition, according to Ballotpedia.

The legislation has the support of big-name individuals such as Lt. Gov. Gavin Newsom and Napster co-founder Sean Parker; endorsements from numerous California newspapers, including the Los Angeles Times, San Francisco Chronicle, Orange County Register and San Jose Mercury News; and the backing of groups such as the California Medical Association, California Nurses Association, United Farm Workers, and most of the California Democratic Party.

The proposition does have high-profile opposition, such as U.S. Sen. Dianne Feinstein, D-California; the California Republican Party, and the Libertarian Party of California.

But what Prop. 64 doesn’t have is total support from the marijuana industry. Bigger players such as the California Cannabis Industry Association, National Organization for the Reform of Marijuana Laws, and Marijuana Policy Project of California favor the Adult Use of Marijuana Act. The Weed for Warriors Project, which represents small dispensaries and growers that supply medical marijuana to veterans, opposes the legislation. The California Growers Association, made up of independent marijuana farms and businesses, is neutral.

The growers association’s executive director, Hezekiah Allen, said he agrees with Prop. 64 from a social and criminal justice philosophy. But he won’t vote for it because of the threat it poses to the long-term viability of existing cannabis farms. He said the bill favors big business, not independent marijuana farmers and retailers.

On his website, Allen notes that a slew of marijuana regulations are about to be enacted under the Medical Marijuana Regulation and Safety Act (MMRSA), legislation signed by Gov. Jerry Brown in 2015. That law governs licenses for cannabis dispensaries and creates a new state agency to oversee the industry, but those regulations would be undone or made less effective if Prop. 64 passes, Allen said.

“The legislature opened the faucet of regulation and has continued to work actively with the administration and state agencies to ensure an expeditious transition,” he said. “(The Adult Use of Marijuana Act) opens the floodgates of commercial and industrial cannabis and threatens to wash away all the progress that has been made.”

Dodge agrees.

“The timing is wrong,” he said. “(MMRSA) needs more time to settle in. Why not just modify, through the Legislature, the current MMRSA regulations? This would at least let the people speak on this through their legislators.”

The general consensus among a deeply divided growers industry is that Prop. 64 has “a really bad regulatory framework,” Allen told the San Francisco Chronicle. “But a lot of people are going to vote for it anyway, because there really isn’t a viable alternative.”

Proposition 64’s opponents also include law enforcement, ranging from the California District Attorney’s Office to the California Highway Patrol. They cite potential safety risks from driving under the influence, additional crimes committed due to impaired judgment, and higher crime management costs. Some religious affiliates, such as The Church of Jesus Christ of Latter-Day Saints and the International Faith Based Coalition, oppose the bill as part of their anti-drug stance. The California Hospital Association, unlike most of its peer groups that favor legalization, has given a thumbs-down out of user medical concerns.

Sutter Health, a network of 50,000 doctors and employees statewide, has not stated a position.

But retired Sutter CEO Patrick Fry said he would not vote for Prop. 64 because “it would just be opening Pandora’s box.”

What’s driving the legislation, according to Fry, is a shaky California general fund.

“When you have a budget deficit of $5 billion to $7 billion, $1 billion in additional tax revenue won’t plug the hole,” he said. “I just don’t think it’s the right thing to do. But the voters will soon make that decision.”

From Bedard's point of view, there’s no reason the initiative should fail.

“All this bill does is recognize that your personal property is your castle, and that you ought to be able to do something that’s not harmful to others while in your own home,” he said.

Bedard notes that there are more inconsistencies with laws regarding home-brewed alcohol. “There’s a whole portion of the law that says you can’t sell it,” he said. “[But] if you make 200 gallons of wine, you can donate it to a charity, which can sell it, and then you get a tax deduction.

“If you can brew that much alcohol in your home – which is definitely more dangerous than marijuana in terms of addiction and toxicity – you should be able to grow your six plants for your personal use.”

California (revenue) dreamin'

Proposition 64’s potential windfall has led to a run on potential pot-growing property in California. Some buyers are taking the land to start their own businesses, but others are acquiring it as a short-term investment as land values increase.

Real estate agents in the Emerald Triangle, consisting of Humboldt, Trinity and Mendocino counties – where 60 percent of the nation’s marijuana is grown – report that land prices have increased by about 150 percent in the past two years, according to the San Francisco Chronicle. One real estate broker said the land rush is like “pot on crack.”

A similar buy-up is being seen 250 miles south in Yolo County, which in October stopped issuing commercial marijuana growing permits to new property owners, according to the Davis Enterprise.

And the Los Angeles Times reports that landowners in Desert Hot Springs, the first Southern California city to legalize large-scale marijuana cultivation, are being offered up to 10 times appraised value by eager growers and developers. Some of the desert properties don’t even have roads. “It’s pretty chaotic,” Marc Robinson, a local real estate broker, told the Times. “I’m getting tons of calls from all over the world, all over the United States. My newest clients flew over from Germany.”

Growers aren’t thrilled

Those who supply the crop anticipate lower marijuana prices due to increased competition. There’s already a downward trend: Marijuana sold for about $3,200 a pound in 2006 but has since dropped to about $1,500 a pound, according to Allen.

That’s barely a break-even point for many small marijuana operations, according to growers. There’s also the fear that some of the newcomers will be, or will evolve into, corporate-sized cultivators and squeeze them out.

Proposition 64 supporters note that the legislation places a five-year delay on issuance of licenses to anyone who plans to cultivate 22,000 square feet or more of cannabis. Even then, the licenses would be granted after a case-by-case review by state regulators.

Bedard doesn’t doubt that the Adult Use of Marijuana Act will result in some large players within the marijuana industry. But those growers with a great, unique product will survive, he said.

He said the situation resembles that of the Northern California wine industry, where small growers increasingly have to compete against corporate producers. “There will be some competition [among marijuana farmers] in five years, but ultimately, quality is going to prevail.”

In the long run, consolidation could help smaller growers if they try to get out of the business, Bedard adds.

“Let’s say you’ve been at it for 30 years and decide to retire,” he said. “Maybe there’s that smaller, newer-to-the-industry guy next to you that you can sell your business to. It works for you; it works for him. This is how it happens in the medical industry. Marijuana will be no different.” 

The Adult Use of Marijuana Act will also play a role in how people get their marijuana. California’s booming weed delivery service, an industry that got a kick start when Prop. 19 failed in 2010, will grow further if cannabis becomes more easily accessible.

Proposition 64 will allow certain couriers to make their deliveries if they are for a marijuana-oriented “licensed retailer” or “micro-business.”

Whatever ultimately happens in California will be watched by lawmakers, business people and marijuana advocates elsewhere. Twenty-two other states allow medical marijuana use. Alaska, Colorado, Oregon, Washington, plus the District of Columbia, have legalized recreational use. Five more – California, Arizona, Massachusetts, Maine and Nevada – may join that list in November.

“Many in the business and financial sector have taken a wait-and-see approach,” said Troy Dayton, CEO of the cannabis market analysis firm ArcView Group. “But the legalization of cannabis is one of the greatest business opportunities of our time. It’s still early enough to see huge growth.”

October 20, 2016 - 4:00pm