How Not to Legalize Pot

Thanks to regulatory missteps, legal marijuana remains scarce and expensive in Washington.

Tomorrow voters in Alaska, Oregon, and Washington, D.C., will decide whether to legalize marijuana. If they look for guidance to the two states that took that step in 2012, they will see a situation in Colorado that falls far short of the cannabis catastrophe predicted by prohibitionists. The legal industry is thriving, although it has not entirely displaced the black market yet, and marijuana-related problems are minimal so far, although controversy swirls around issues such as regulation of edibles and restrictions on consumption. If voters contemplating legalization turn their attention to Washington, which has been plagued by regulatory delays and uncertainty, there are lessons to be learned there too, but they mostly concern what not to do.

John Urquhart is the sheriff of King County, which includes Seattle. As a candidate for sheriff in 2012, he endorsed I-502, the initiative that legalized marijuana for recreational use in Washington. During a conference on marijuana regulation in Irvine, California, last week, Urquhart alternated between praising his state's approach and conceding that implementation has been more than a little bumpy. His overall message: Things are great, and it will all work out in the end.

For insight into the reasons for this ambivalence, consider the letters that the city of Seattle sent to more than 300 medical marijuana businesses last week. The city warned the growers, processors, and dispensaries that they cannot continue to operate unless they have state licenses by next July. The main obstacle to complying with that expectation is that Washington does not license medical marijuana businesses, even though they have been around a lot longer than the recreational shops that began opening last July. The state legislature considered several medical marijuana bills this year, some of which would have shut down the existing dispensaries and some of which would have incorporated them into the licensing system created by I-502. But none of those bills passed.

John Davis, who operates two medical marijuana dispensaries in Seattle, sees the city's warning letters as an attempt to spur legislative action next year. Here is how he sums up the Seattle City Council's message to dispensary owners: "Hey, look, this'll give you a legislative cycle. Everyone's thinking that we're going to get something through this legislative cycle. But if we don't, we'll come revisit." The city council, which originally gave dispensaries a deadline of January 1, 2015, has had to revisit the issue before. Davis thinks "they want the legislators to be a little bit frightened: You guys might end up being the closers of all these shops. To make the legislators think a little bit how politically unpopular that would be."

Instead of building on the existing medical marijuana industry, as Colorado did, Washington tried to start from scratch, which created two parallel systems for producing and distributing cannabis (three, counting the black market). Now the challenge is to protect bona fide patients' access to their medicine without leaving the new shops vulnerable to competition from dispensaries that charge less, largely because they are not subject to Washington's heavy marijuana taxes. In an editorial published last week, The Seattle Times faulted legislators for creating a situation in which state-licensed stores serve only a small share of the city's marijuana market:

Combined sales at Seattle's recreational marijuana stores trail those in Vancouver, Spokane and even Bellingham. On a per capita basis, Seattle's sales are about half of Yakima's and one-third of Tacoma's…

Seattle marijuana users shun recreational stores because they're getting the cannabis from a larger, cheaper and unregulated source: medical-marijuana dispensaries.

As Seattle's former U.S. Attorney Jenny Durkan warned last month, medical marijuana is "not a loophole. It is the market."

The Times wants to see new restrictions on medical marijuana, aimed at forcing recreational consumers to get their pot from the state-licensed stores instead of posing as patients. But it concedes that the weak condition of the newly legal marijuana industry is "partly due to the glitchy launch of the recreational market created by Initiative 502." It notes that "supply problems have led to sky-high prices and late-opening stores."

Washington's stores began opening six months after Colorado's, and they've had a wobbly start. As of Tuesday, the Washington State Liquor Control Board (LCB) had issued licenses to 68 retailers, a fifth of the 334 it originally envisioned. Just four of those licensees are located in Seattle, which is home to something like 200 medical marijuana suppliers. To provide the marijuana sold in the state-licensed stores, the LCB so far has approved about 250 growers, which does not necessarily mean all those growers have received the local approval they need to operate. With more than 2,200 production applications still pending, the LCB is already talking about raising the cap it imposed on total cultivation from 2 million to 8.5 million square feet of plant canopy.

That limit, which has been exceeded by the production licenses awarded so far, was supposed to translate into about 25 percent of the total market, the initial goal that the LCB set for state-licensed stores. Its fear at the time was that growers would produce too much marijuana—so much that the excess would end up in other states, possibly provoking the federal government to intervene in Washington's experiment. The actual problem is exactly the opposite: too little legal marijuana, leading to shortages and high prices. "A lot of [the state-licensed stores] won't keep their doors open consistently because the material's been in very short supply," Davis says, "so they'll get some, and then people will go there, buy it, and then they'll close."

When marijuana is available, it's expensive. At Uncle Ike's in Seattle, prices range from $21 to $28 a gram, including all taxes. Cannabis City, another Seattle store, advertises prices ranging from $20 to $24 per gram after taxes. Ocean Greens has a few strains that are much cheaper, going for about $11 per gram after taxes, but its top price is higher, about $30 after taxes. By comparison, Davis sells his very best cannabis for about $15 a gram after the standard sales tax, which is the only levy that applies to medical marijuana. Davis says black-market prices in Seattle range from $10 to $15 a gram. One more comparison: After-tax prices for recreational marijuana in Denver range from $12 to $20 a gram, and those prices are expected to fall dramatically as newly licensed growers start harvesting early next year.

When I interviewed Alison Holcomb, the Seattle lawyer who spearheaded the I-502 campaign, back in January, she figured the prices charged by state-licensed stores in Washington "will be just about the same as the black market," although "they might be a little bit higher than the black market in the beginning." That prediction proved to be rather optimistic. By June it was clear that legal prices would be much higher than black-market prices, which will remain true for the near future at least. Although pot prices should drop as more growers are licensed and begin harvesting, Washington's hefty taxes, which make marijuana cost about 60 percent more than it otherwise would, will continue to give black-market dealers an advantage.

"I think more people will start to figure stuff out, get their permits, get something up and running," Davis says. "But I don't think it's going to happen all at once. We're going to be facing shortages at least until next October—probably after that." In retrospect (and not just in retrospect), regulators' obsession with preventing "overproduction" through central planning seems misguided, to say the least. "They were worried about producing too much," says Davis. "After talking to the state's experts, they were like, 'My God, we're just going to have so much, these people are going to sell it to other states.' And I was like, no, no, no, don't be so restrictive….It's going to be a while before that demand can be met."

This article originally appeared at Forbes.com.