In Hawaii, people prefer black-market cannabis to government-run facilities

Granted, since recreational cannabis is still illegal in Hawaii — and decriminalization isn’t coming until 2019 — such a high number isn’t very shocking. Still, those legally involved in Hawaii’s cannabis industry claim that these numbers are only so high because of poor “market structure and regulation.”

When it comes to why people choose black market cannabis, one of the most common answers is high taxes. As the industry stands now, Hawaii’s cannabis market is worth about $240 million. With estimates that it could rise to $354 million if recreational activities are legalized.

That being said, this latest report claims such numbers are modest compared to the $8 billion in tax revenue the state is already seeing. Therefore, apart from the fact that there is no financial incentive to raise taxes, there may be a legal incentive to lower taxes.

Some respondents to the report believe that if Hawaii is legalized, it should avoid “onerous levels of regulation and taxation” designed to overshadow the state’s illicit market.

Still, this black market problem probably goes beyond taxes. There are currently only 8 legal medical dispensaries in the entire state. Everyone is struggling to make profits.

According to Randy Gonce, executive director of the Hawaii Cannabis Industry Association, only three of these dispensaries break even. And none of them pay a return for investors.

Gonce continued: “They are not successful companies on paper. They work with a very limited consumer base with strict, strict regulations. Your taxes are really, really high, you can’t write off your taxes… at the federal level – it’s just a tough industry.”

So what can be done to get more people to turn to the government medical program?

Breakdown of Hawaii’s medicinal cannabis program

While medicinal cannabis has been legal in Hawaii since 2000, it hasn’t evolved much in the last two decades.

One of the biggest problems is that the list of qualifying conditions is extremely limited with only 15 diseases acceptable for a prescription. Still, the severity of these conditions plays a big part in whether or not a doctor recommends marijuana as a cure at all.

An even bigger problem, however, is the lack of access to cannabis. Currently, Hawaii has nearly 35,000 registered medical patients. As previously mentioned, all of these patients are confined to the eight dispensaries across the state, which are restricted to specific islands. Medicinal patients, on the other hand, do not have direct access to medicinal cannabis on Lanai or Molokai.

Crowning these problems is the 4.5% general excise tax (GET) associated with all marijuana products. However, this number is lower in other parts of the country. In California, for example, there is a 15% excise tax on all retail cannabis products.

But as access to business licenses has become more accessible in California, we’ve seen more farms grow produce. This, in turn, has brought prices down – allowing for an overall more affordable product for consumers.

In Hawaii, on the other hand, cultivation licenses start at a fee of $75,000 — with a $50,000 renewal fee per year. Since the market has been around for a while and it is obvious that there is little profit in the industry, it is a no-brainer not to invest in such ridiculous fees.

Due to lack of production, Hawaiians import cannabis

So how do you get around the problems of Hawaii’s medical industry?

A simple answer would be recreational legalization to expand the consumer base. However, this can prove to be more difficult than it seems. For one thing, Hawaiian voters are almost 50/50 split on this issue. Second, outgoing Gov. David Ige opposes recreational use, keeping lawmakers away from the issue in recent years.

The upcoming Midterms will play a significant role in how this issue will be addressed in the years to come. With the nominees Lt. gov. Josh Green (D), who supports the legalization of recreational activities, and Lt. gov. James “Duke” Aiona (R), who is opposed.

Even if it is legalized, there’s a chance Hawaii’s market will continue to struggle. And that’s simply because the country’s industry lacks production. In fact, most cannabis in Hawaii isn’t even grown within the state — it’s shipped out of California.

That being said, it may be impossible for Hawaii to address the illicit market problem since the source of this problem is thousands of miles across the Pacific.

According to a task force report, “Illegal California cannabis is cheap and of relatively good quality. This market dynamic will not go away even if Hawaii decides to legalize adult use.”

To combat the problem immediately, Hawaii’s law enforcement agency has become more aggressive in prosecuting illegal operations. But even this aggressiveness could not stop the growth. As the task force reported, the illicit market has grown so large that the state is already a part of the national cannabis market.

So what can be done in Hawaii?

Ultimately, Hawaii needs to create a fairer legal market to get into the black market. As mentioned, the price of entry into the industry is ridiculously expensive — with investors weary of even the big financial incentives due to the lack of demand.

As Gonce says, “What we want to do is have a very low barrier to entry, but still with certain things to maintain the integrity of the business.” He furthered this by saying that groups should be monitored, cash flow should be tracked and the government should test products for purity and potency.

However, these changes should only be implemented if they lower prices for consumers. As of now, legal Hawaiian cannabis is 40% to 100% higher than that in the illegal market. For example, an ounce costs about $350 in a pharmacy, while the price drops to $250 in the illegal market.

In order to lower prices, production in the state must increase. And in order to increase production, the state urgently needs to make the market more accessible to newcomers.

As the report states: “Issues related to market structure and regulation result in high prices that are uncompetitive compared to the grey [illicit] Market. Laws and regulations that limit scope, market size, competition and specialization create an unfavorable market structure.”