Even though California legalized the consumption and sale of recreational cannabis in 2016, its legal weed industry has struggled in the face of high taxes, local government opposition, and burdensome regulation. As a result, much of the market remains underground. For example, estimates from 2018 suggest legal sales account for only 20–25% of total sales. Unlicensed businesses and dispensaries have become commonplace.

This outcome was predictable: the CA “legalization” includes burdensome regulation and significant taxation. Retailers musts submit a real-estate owner authorization, a premises diagram, hold a $5,000 surety bond to cover the destruction of its own cannabis should its license be infringed upon, deliver forms of transportation, inventory, quality control, security and delivery procedures to make sure all rules are followed. Cannabis businesses must also use the California Cannabis Track and Trace (CCTT) system to track marijuana from “seed to sale” and test cannabis for residual solvents, chemicals, and pesticides in certified labs. And this is an incomplete list.

Further, CA imposes substantial taxation. Consumers pay an 8.5% sales tax on recreational – but not medical – marijuana. Plus, retailers pay a 15% excise tax on purchases from distributors. Finally, cultivators must pay a tax based on weight and type of cannabis (leaves, flowers, and plants pay different tax rates) when selling to distributors.

Even worse, marijuana companies must be licensed by the state and by a local authority to grow or sell cannabis within that jurisdiction. But over 70% of municipalities ban recreational marijuana sales, and another 5% of counties have no licensed dispensary, even though recreational marijuana is legal under county rules.

California’s approach is thus thwarting some benefits of legalization, like safer products and increased tax revenue. Over-regulation often means less regulation (de facto), the same way over-taxation often means lower tax revenue. If performing lab tests, requiring complex identity checks, and paying taxes are excessively costly, retailers and consumers simply shun the legal market. And illegal dealers are not likely to follow regulation partially – if you are breaking a rule, why not break others? The upshot is that consumers get unreliable cannabis products, just as before.

This is not an isolated phenomenon. Cigarettes have been increasingly regulated and taxed throughout the world; consequently, cigarette smuggling and counterfeiting are a booming business. For instance, a pack of 20 cigarettes in Australia costs on average $27.85. Predictably, the illegal Australian cigarette market is estimated to account for 15% of overall sales in 2017, implying billions in evaded taxes.

Policymakers in CA or elsewhere should deregulate the industry and lower taxes. Prohibition and legalization are not an on and off policy lever, but rather a continuum. If cannabis is formally legal but severely restricted by government action, the effects are similar to prohibition. And this is exactly what the War on Drugs has taught us to avoid.