In Hawaii, People Prefer Black Market Cannabis to State-Managed Facilities

Admittedly, since recreational cannabis remains illegal in Hawaii—with decriminalization only happening in 2019—such a high number isn’t very shocking. Still, those legally operating in Hawaii’s cannabis industry claim those numbers are only so high due to poor “market structure and regulation.”

When it comes to why people choose black market cannabis, one of the most common responses is high taxes. As the industry stands now, Hawaii’s cannabis market is worth about $240 million. With estimates that it could climb to $354 million upon recreational legalization.

That being said, this recent report claims such numbers are modest compared to the $8 billion a year of tax collections the state already sees. Therefore, beyond the fact that there’s no financial incentive to raise taxes, there may be a legal incentive to lower taxes.

Some responders to the report believe that, if legalized, Hawaii should avoid “burdensome levels of regulation and taxation” in order to overshadow the state’s illicit market.

Still, this black market issue likely goes beyond taxes. Currently, there are only 8 legal medical dispensaries across the state. All of which have struggled to turn a profit.

According to Randy Gonce, executive director of the Hawaii Cannabis Industry Association, only 3 of these dispensaries are breaking even. And none of them are paying a return on investors.

Gonce continued: “On paper, they’re not successful businesses. You’re working on a very limited consumer base with heavy, heavy regulations. Your tax is really, really high, you can’t write your taxes off… at the federal level – it’s just a hard industry to be in.”

So, what can be done to get more people to turn to the state’s medical program?

Breaking Down Hawaii’s Medical Cannabis Program

While medical cannabis has been legal in Hawaii since 2000, it hasn’t progressed significantly in the last two decades.

One of the biggest issues is its list of qualifying conditions is extremely limited, with only 15 ailments acceptable for a prescription. Even still, the severity of these conditions plays a major role in whether or not a doctor will even recommend marijuana as a remedy.

However, an even bigger issue is the lack of access to cannabis. Currently, Hawaii has just under 35,000 registered medical patients. As mentioned, all those patients are limited to the eight dispensaries across the state which are limited to specific islands. In turn, medical patients on Lanai or Molokai have no direct access to medical cannabis.

The cherry on top of these issues is the 4.5% General Excise Tax (GET) attached to all marijuana products. Admittedly, this number is lower in other parts of the country. For example, in California, there’s a 15% excise tax on all retail cannabis products.

But since access to business licensing in California is more attainable, we’ve seen more farms growing products. In turn, this has driven down prices—allowing for an overall more affordable product for consumers.

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

With Lack of Production, Hawaiians are Importing Cannabis

So, how do you circumvent the problems of Hawaii’s medical industry?

An easy answer would be recreational legalization in order to broaden the consumer base. However, this may prove more difficult than it seems. For one, Hawaiian voters are split nearly 50/50 on the issue. Secondly, outgoing Gov. David Ige opposes recreational use, keeping lawmakers away from the topic over the last few years.

The upcoming midterms will play a significant role in how this issue is tackled in the next few years. With nominees Lt. Gov. Josh Green (D) supporting recreational legalization and Lt. Gov. James “Duke” Aiona (R) opposing it.

Still, even if legalized, chances are Hawaii’s market will continue to struggle. And this is simply due to the fact that the state’s industry is lacking in terms of production. In fact, most of the cannabis in Hawaii isn’t even grown within the state—it’s being shipped in from California.

With that said, it may be impossible for Hawaii to tackle the problem of the illicit market as the source of this issue is thousands of miles across the Pacific.

As a task force report states: “Illicit California cannabis is cheap and of relatively good quality. This market dynamic will not go away even if Hawaii opts to legalize adult use.”

In order to combat the issue immediately, Hawaii’s law enforcement has become more aggressive in prosecuting illegal operations. But even such aggressiveness hasn’t been able to stop growth. As the task force reported, the illicit market has gotten so large that the state’s already a part of the national cannabis market.

So, What Can Be Done Within Hawaii?

Ultimately, in order to start coming down on the black market, Hawaii needs to produce a more equitable legal market. As mentioned, the price of entry into the industry is ridiculously expensive—with capital investors even weary of such large financial incentives due to the lack of demand.

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

However, these changes should only be implemented if they’re reducing prices for consumers. As of now, legal Hawaiian cannabis is 40% to 100% higher than that of the illegal market. To give an example, an ounce in a dispensary costs around $350 whereas the price drops to $250 in the illicit market.

In order to lower prices, production within the state needs to increase. And in order for an increase in production, the state desperately needs to make the market more accessible to newcomers.

As the report indicates: “issues related to the market structure and regulation result in high prices that are uncompetitive relative to the gray [illicit] market. Laws and regulations that limit scale, market size, competition, and specialization create an unfavorable market structure.”