Seven months after Colorado legalized recreational pot, the state has an unexpected problem. It needs to grow more.
Because even though sales have surged, only about 60% of the marijuana sold is the legal variety. The rest is either illegal or grown unregulated in the so-called gray market, where unlicensed citizens can grow for their own use.
Colorado residents and visitors will consume an estimated 287,000 pounds of marijuana in 2014, but only about 170,000 pounds will come from legal medical or recreational outlets, according to a report commissioned by the state Marijuana Enforcement Division.
The rest, about 118,000 pounds, or 41%, is expected to be produced by people who can legally grow up to six pot plants for personal consumption, registered caregivers who provide marijuana to medical patients, and black market producers, including gangs, who operate outside the Colorado legal system.
As a result, Colorado state regulators are trying to increase the amount of marijuana produced and sold by legal retailers.
"Right now, we are pretty significantly under what should be produced," said Ron Kammerzell, deputy senior director of enforcement for the state Department of Revenue.
"What that does is, (it) raises the prices and if the price is too high, then we can't compete with the black market and that was our ultimate goal — we wanted to eliminate the black market," Kammerzell said.
However, new data comparing demand for marijuana in Colorado with the legal supply suggest that criminal enterprises could stay in business.
"Basically, the state is trying to ensure that the amount that is being grown in Colorado equals what the demand is," said Mike Elliot, executive director of Marijuana Industry Group, a trade association for the state's marijuana industry. "If there is too much, then people want to take it out of state or sell to kids (minors), and if there is too little, then the black market will fill in the gaps."
Reducing the black market is not only a state goal but also a federal priority.
U.S. Deputy Attorney General James Cole issued a memorandum last year that listed selling to minors, exporting marijuana out of state and enriching the black market as offenses to be avoided in order to keep the Justice Department on the sidelines in states where pot is legal.
Although the state, federal government and legal marijuana businesses all hope to undercut the black market, their ideas about how to do so vary dramatically.
Marijuana retailers say supply isn't the issue. The real problem is price.
"After the cost of producing each pound, I still have to pay a 15% excise tax, licensing fees, huge rent because landlords overcharge marijuana dispensaries, and when I pay federal income tax I can't deduct like a regular business," said Brian Ruden owner of Starbud, Altermeds and Tree of Wellness medical and recreational outlets in Denver, Colorado Springs and Louisville, Colo. "I am selling an eighth (of an ounce) for $60 when the street price is about $25."
On average, state, local and federal sales taxes on recreational marijuana are just over 21%, while the taxes on marijuana for medical uses are about 7.6%. The federal government still categorizes marijuana as a dangerous illegal drug, but it collects tax revenue on its legal sale in Colorado and Washington.
The black market benefits from the high taxes, too — because its products can be sold for much less.
"I have had locals come in here without their med cards, and ask what our recreational prices are and just turn around and leave," said Nelson Figueiredo, a "budtender" at Medicine Man dispensary in Denver. "They have friends who can sell them pot much cheaper."
As the Colorado industry continues to grow, regulators hope to allow steady growth of the legal market.
"We really want to do this in a very predictable and controlled way," Kammerzell said. "I think what we are seeing is that the biggest driver right now is supply, and that is what we intend to address."