California’s cannabis industry is at a crossroads. Despite continued growth in legal cannabis production, the illicit market remains a dominant force, undermining the regulated industry. Legal cultivators face an uphill battle against high taxes, strict regulations, and market saturation, while unlicensed operators continue to flourish. The state’s efforts to transition consumers and businesses into the legal framework have seen mixed success, raising questions about what it will take to create a thriving, competitive, and fully regulated cannabis market.

This article examines California’s expanding legal cannabis sector, the persistent challenges posed by illegal operations, and potential solutions to strengthen the industry’s long-term viability.

Legal Cannabis Production in California Sees Steady Growth

California’s legal cannabis production continues to expand, driven by rising consumer demand and increased accessibility through licensed dispensaries. In 2024, the state’s licensed cultivators produced approximately 1.4 million pounds of legal cannabis, reflecting an 11.8% year-over-year increase. This growth signals the industry’s resilience despite regulatory hurdles and economic pressures.

The increase in legal production stems from a combination of factors, including technological advancements in cultivation, streamlined supply chain logistics, and a growing number of dispensaries operating within legal frameworks. However, while production within the regulated market grows, the illicit sector remains a formidable competitor, significantly outpacing licensed operations.

The Unyielding Strength of the Illicit Market

Despite efforts to curb illegal cultivation and sales, the black market for cannabis in California remains stronger than the legal sector. Estimates suggest that in 2024, unlicensed growers and distributors produced roughly 11.4 million pounds of cannabis—over eight times the volume of legal production. A large portion of this illicit cannabis is sold outside of California, bypassing state regulations and taxes.

This thriving underground market exists for several key reasons:

• High State and Local Taxes: Legal cannabis products are heavily taxed, driving up prices. Consumers looking for affordability often turn to unregulated sellers, who can offer significantly lower prices.
• Licensing and Regulatory Barriers: Many small-scale growers find it difficult, if not impossible, to enter the legal market due to complex licensing requirements, expensive fees, and local bans on commercial cannabis operations.
• Retail Availability Constraints: Despite state legalization, nearly 60% of California cities and counties prohibit cannabis dispensaries, limiting legal access and indirectly fueling the black market.
• Law Enforcement Challenges: Limited enforcement resources allow illicit operators to persist with little fear of consequences. Even when illegal grows are shut down, they often reappear in new locations.

Why Legal Cannabis Businesses Are Struggling to Compete

For licensed cannabis businesses, competing with the illicit market presents significant difficulties. Legal operators face a range of financial and regulatory challenges that impact their ability to remain profitable.

1. High Tax Burdens on Legal Operators

California imposes some of the highest cannabis taxes in the country, including state excise taxes, cultivation taxes, and local taxes. In some regions, combined tax rates on legal cannabis products can reach 40% or more, making it difficult for licensed businesses to offer competitive pricing against illicit sellers.

While recent tax reforms eliminated the cultivation tax in an effort to support licensed growers, the remaining taxes still create a major pricing gap between the legal and illicit markets.

2. Oversupply and Declining Wholesale Prices

An excess of legally grown cannabis in the state has led to falling wholesale prices, putting further strain on cultivators. Prices for wholesale cannabis have dropped dramatically over the past few years, making it difficult for growers to sustain their operations.

At the same time, the illicit market remains profitable for illegal cultivators, as they are not subject to the same regulatory costs, allowing them to undercut legal competitors.

3. Limited Retail Access in Many Areas

Many counties and cities in California have opted out of allowing legal cannabis businesses, despite the state’s approval of adult-use cannabis in 2016. This creates “cannabis deserts” where residents have no access to legal dispensaries, forcing them to seek out unregulated sources.

Even in areas where dispensaries are allowed, obtaining a retail license is an expensive and time-consuming process. Many small business owners struggle to secure the funding and approvals necessary to operate legally.

4. Weak Enforcement Against Illicit Operators

While California has made efforts to crack down on illegal cannabis farms and unlicensed dispensaries, enforcement remains inconsistent. Illicit operations often outmaneuver law enforcement by moving locations or operating discreetly. The sheer volume of illegal cannabis production makes it difficult for authorities to shut down all unlicensed activities.

The Role of Interstate Cannabis Trafficking

A significant portion of California’s illicitly grown cannabis is not consumed within the state. Instead, large quantities are trafficked to other states where cannabis remains illegal.

Because California has an ideal climate for cannabis cultivation and a long history of underground production, illegal growers continue to take advantage of the demand in states where cannabis is either not legalized or heavily restricted.

Federal legalization and the introduction of interstate cannabis commerce could help address this issue by allowing legal producers to sell excess supply to other states. However, as long as cannabis remains federally illegal, illegal operators will continue to exploit out-of-state demand.

Strategies to Strengthen the Legal Market

While the challenges facing California’s cannabis industry are significant, several potential solutions could help level the playing field for legal businesses and curb the dominance of the illicit market.

1. Tax Reductions to Improve Competitiveness

Lowering state and local taxes on legal cannabis would help make licensed products more affordable for consumers. By reducing the price gap between legal and illegal cannabis, the state could incentivize more consumers to purchase from licensed dispensaries.

2. Streamlined Licensing and Lower Barriers for Small Businesses

Simplifying the licensing process and reducing fees could encourage more small and medium-sized growers to enter the legal market, increasing competition and diversifying the industry.

Local governments should also be encouraged to allow more licensed cannabis businesses to operate, increasing accessibility and reducing the need for consumers to turn to unregulated sources.

3. Stronger Enforcement Against Illegal Operations

Allocating more resources to combat illegal cultivation and unlicensed dispensaries would help reduce illicit competition. Increased funding for law enforcement efforts, coupled with harsher penalties for repeat offenders, could deter illicit operators.

4. Expanding Consumer Education and Incentives

Educating consumers about the risks associated with purchasing illegal cannabis—including contamination risks, lack of testing, and support for criminal enterprises—could help shift demand toward the legal market.

Additionally, state-funded rebate or discount programs for first-time legal cannabis buyers could encourage more consumers to make the switch to regulated dispensaries.

The Future of California’s Cannabis Industry

California’s legal cannabis industry has made substantial progress since legalization, but the dominance of the illicit market remains a significant obstacle. As long as illegal operators can offer lower prices and wider availability, the legal market will continue to struggle.

Policymakers, industry stakeholders, and law enforcement must work together to create a more sustainable and competitive cannabis market. By reducing taxes, streamlining licensing, and improving enforcement, California can help its legal cannabis industry reach its full potential while diminishing the influence of unregulated operators.

The next few years will be critical in determining whether the legal cannabis industry can flourish or remain overshadowed by the black market. With the right strategies in place, California has the opportunity to solidify itself as a leader in regulated cannabis while ensuring a fair, profitable, and consumer-safe industry.