Since World War II, California has dominated the culture, politics, and industry surrounding cannabis in America. From transforming the popular connotation around the drug to establishing a successful medical marijuana apparatus in 1996, the state has played a foundational role in the drug’s identity today. Following several failed attempts, and policy concerns such as regulatory capture and dependency exploitation, Californians approved Proposition 64 in 2016, legalizing the drug’s sale and consumption. Three years later, this analysis compiles evidence of successes and failures across the legal market; including the issues arising from the federal government’s problematic position, the inaction around marijuana-related incarceration, an unfairly distributed regulatory apparatus, suffocating compounding taxation, and decentralized political power. The cannabis industry in California today is characterized by underwhelming tax revenue for the government, racial justice frustration, a rapidly deteriorating small grower class, and a thriving black market. This analysis culminates with ten policy recommendations to ameliorate California’s marijuana policy and improve outcomes across the nascent industry.
Since the days of the Counter-Culture movement, California has been at the forefront of the Cannabis Movement, providing the cultural, political and economic foundation for future social progress across the country. Today, the cannabis industry in California represents millions of jobs, serves tens of millions of Americans, and circulates billions of dollars. The Drug Enforcement Administration estimated that 70% of the nation’s cannabis supply comes from California. Despite not being the first state to legalize, many more reluctant states are observing California and its marijuana policy and the transition to legalization due to the state immense size and importance. Three years since Proposition 64 passed legalizing marijuana, legal and safe marijuana has become available to many Californians, however policy failures across all levels of government have demonstrated the detriment of poorly-designed policy. This analysis finds that California has failed to curtail the marijuana black market due a myriad of factors; including inadequate market access, over-taxation, burdensome regulations, and federal hypocrisy. Cumulatively these miscalculations have resulted in the California’s legal market representing only about 20% of all the marijuana purchased in the state and many small growers returning to the black market.
II. THE ROAD TO PROPOSITION 64
The state of California’s modern regulatory history with cannabis began in response to the counter-cultural movement of the 1960’s. Partially a result of the drug’s widespread and overt use by otherwise law-abiding citizens (specifically white suburban teenagers) and through the efforts of libertarian organizations such as NORML, cannabis was decriminalized with the 1975 Moscone Act. Decriminalization would present one of many examples in American history of framing identity shaping government policy. Post-war California exemplified what Courtwright labels the Marijuana Complex, as cannabis was perceived entirely as a recreational and hedonistic drug. This connotation ultimately doomed early legalization efforts, such as Proposition 19 in 1972. Despite early political setbacks, the counterculture movement establishes California as the cannabis cultivation and ingestion capital of the United States.
During the 1980’s and the explosive HIV epidemic, the public perception of marijuana began to shift from a purely hedonistic, counterculture drug to an innocent remedy with untapped medicinal potential. This shift is largely attributed to rising visibility of HIV-positive gay men as cannabis became a widespread treatment to reduce pain for a drug which had (has to this day) no cure. As high profile arrests, such as “Brownie” Mary Rathburn, began to publicize in the media the drug’s medicinal and therapeutic qualities, progressive communities such as San Francisco began to build momentum for legalization.From rebellious intoxicant to pain-relieving medicine, HIV and the transformation of marijuana’s connotation laid the foundation for the policy change to come.
Support for marijuana legalization steadily grew throughout the 1990’s and became increasingly influential and organized. In 1994, Senate Bill 1364, to reclassify cannabis as a Schedule II drug at the state level, was approved by state legislators. In 1995, Assembly Bill 1529, establishing a medical necessity defense for cannabis use with a physician’s recommendation for patients treating AIDS, cancer, glaucoma, or multiple sclerosis, also landed on the governor‘s desk. Both were vetoed by Governor Pete Wilson. Frustrated, proponents pivoted their strategy towards public opinion. In 1996, proponents gathered the required signatures to place Proposition 215 directly on the November state ballot. As a necessary compromise to ensure passage of the measure, Proposition 215 only legalized cannabis for medicinal purposes. 56% of Californians approved, and in November of 1996 California becomes the first state in the nation to legalize medicinal marijuana.
Over the next decade, the execution of Proposition 215 proved to be an enormous success, with 200,000 Californians in need able to acquiring the drug from medicinal dispensaries every year. This success was demonstrated by the continued growth in support for the legalization of both medicinal and recreational marijuana. In 1996, just 25% of Americans supported recreational legalization, compared to 44% in 2010 and 62% today. In 2010, California legislators reduced penalties for cannabis possession to a civil infraction, equivalent to a parking ticket. Later that year California became the first state to vote on a ballot measure seeking to legalize recreational cannabis, fittingly named Proposition 19. Despite little funded opposition, Californians rejected Proposition 19 53.5% to 46.5%.
Following the failure of Proposition 19, the cannabis industry, both medicinal and illegal, continued to grow. For example, from 2012 to 2016 in Humboldt and Mendocino counties, for example, an 80% increase in the number of cannabis cultivation sites and a 56% increase in the average number of total cannabis plants per site was documented. The increase in cultivation sites and production densities are likely due to relaxed enforcement, increased market competition, and rising demand. In 2016, proponents were again successful in placing recreation legalization on the ballot. Despite the efforts of opponents within law enforcement, the prison industrial complex, and other moral opponents, Californians approved Proposition 64, allowing adults 21 or older to possess, transport, and purchase, no more than one ounce of dry cannabis or eight grams of concentrated cannabis.
III. THE PROMISES AND CONCERNS OF LEGALIZATION
Fiscal Responsibility and Social Progress Meet
When considering policy, the historically libertarian case for legalizing recreational marijuana is compelling. Goldsmith reveals “The total cost to society for dealing with [Marijuana] is gigantic. For everything, including law enforcement and prison administration, property damage, medical costs, and—most of all—lost productivity, the estimate for 2007 is $193 billion.” By 2016, Washington and Oregon had already legalized recreational marijuana. Fears of poorly implemented drug policy are valid, however as legalization spreads across the nation it can be reasonably assumed that states will learn from other states and subsequently adapt.
Proponents, such as NORML, presented a multitude of practical reasons for legalizing cannabis. The primary argument centered around the lucrative taxation opportunity, with California estimating $1 billion in addition revenue for the state each year. The California legislature ultimately decided to prioritize funds towards drug abuse prevention, public safety, and environmental protection. Additionally, proponents have highlights potential boosts to the tourism industry from states where marijuana remains illegal, incorporating existing marijuana growers and distributors into the formal economy, and reducing arrests and the incarcerated population as additional benefits of legalization.
Human Health Concerns
Opponents’ concerns with increasing accessibility to a federally classified Schedule 1 drug were not unfounded either. Concerns regarding the effects of increased use and uncertain medical long-term effect, for example, are rooted in the inadequate amount of research resulting from this federal scheduling. This inadequacy of research is especially regarding brains which have no fully developed (brains typically fully development around the age of 25). While marijuana is less addictive than alcohol and other drugs, dependency can still develop. However, if alcoholism and heroin addiction, for example, are already crises plaguing society today, opponents argue against unnecessarily ruining more lives.
There is also a rational fear of industry. Hudak explains “In the so-called vice industries— alcohol, tobacco, gambling— money is not made off those who occasionally indulge. Frequent gamblers, problem drinkers, and those addicted to tobacco deliver those respective industry profits. The same is true for marijuana”. In a state which legalized two years earlier, the Colorado Department of Revenue estimated that frequent and heavy users, those who use marijuana more than twenty days a month, made up just 30 percent of the customer base but accounted for nearly 90 percent of the market demand.” Unsurprisingly, concerns over deceptive candies, gummies, and sodas aimed at kids compounded fears of marijuana legalization.
To address many of these health-related concerns, most medicinal and recreational legal states require distributors to test content and potency of the products they sell. Testing is often combined with strict rules for growing conditions, ensuring the strength and purity of the product. In truth, opponents’ health-related concerns may not be as important to consumers as nonusers. From Eric Spitz in the LA Times; “the idea of testing for toxins and potency did not exist prior to 2018 in California. No one cared about these things in 2017, so why start worrying now? The answer to the question, “Why take the risk?” is simple. “Because I’m saving a lot of money and I haven’t had a problem in the past.””
Beyond human health concerns, logistical policy concerns arose as well. For example, regulatory capture poses a threat to the wellbeing and freedom of the very consumers legalization is designed to benefit. There are certainly advantages to industry actors influencing the regulatory process, however, since many growers and dealers have previous experience in the pre-legalization environment, they have an information advantage over regulators. Well-designed policy and limited consolidation should truncate these fears.
All of these valid concerns reinforce the importance of a state as gargantuan in the global cannabis industry as California executing the transition of cannabis from illegal to legal well. While the potential payoff to marijuana enterprises and individuals is undoubtedly large, very minute policy decisions have potentially immense negative externalities. The cannabis industry represents millions of jobs, serves tens of millions of Americans, and circulates billions of dollars. Given California’s size and historical role, the state’s ability to coral the black market into the formal economy will serve as an important indicator and role model for other, more cautious, states. The failure of a smooth transition, however, could not only delay legalization in other states, but potentially dissuade legalization entirely.
IV. BAD POLICY: CALIFORNIA’S EXECUTION
Before dissecting the imperfections of California’s cannabis policy following Proposition 64, a fundamental contradiction must be acknowledged, of no fault of the state of California or its legislators. Since 1996, and especially as the number of legal marijuana states climbs, the Federal government, through the Department of Justice, has begun adopting a hands-off approach towards regulating the drug (which remains a Schedule 1 controlled substance) in legal states, while continuing to strictly enforce its criminality in all other states. This has created a deeply uncomfortable conundrum where an American can either be a successful entrepreneur or a federal prisoner, depending solely on the state they call home. This hypocrisy interrupts the established notion that federal law should never treat Americans differently based on state of residency. So far, legalized marijuana are demographically much whiter than the average state, presenting a stark and problematic contrast from the country’s population of incarcerated non-violent offenders. Davidson reveals a potential solution relying on judges; “18 USC § 3553(a) provides that one of the factors judges must consider in imposing a criminal sentence is “the need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct,”” however, such a shift in judicial convention has yet to occur at a large scale.
Inadequate Financial Resources
One of the greatest difficulties plaguing small actors within the California cannabis industry, especially those who previously operated within the illegal economy, has been the absence of banking and financial services. Under federal law, marijuana enterprises are engaging in an illegal drug trade, which makes them ineligible to access standard financial services such as checking and savings accounts, lines of credit, and business loans. As a result, small marijuana enterprises must resort to cash-only operations, leading to tremendous insecurity and uncertainty. As states like Oregon and Colorado first began to legalize recreational marijuana, pressure mounted on the federal government to clarify their position, however in 2014 a much-anticipated guidance from the US Department of Treasury proved vague and did not sufficiently offer financial institutions protection against potential federal action. As a result, the financial industry determined the Guidance insufficient to allow their banks to engage with marijuana enterprises. Relying so heavily on cash has widespread repercussions for marijuana enterprises. For example, marijuana enterprises present elevated targets for burglary and opportunities for money laundering become easier.
Non-violent drug incarceration and how to treat former and current offenders presents one of the most contentious debates surrounding legalization. Likewise, the conversation around incarceration is inseparable from both history and race. Looking back, Goldsmith reveals “Unlike many other Western countries, the United States responded to escalating crime rates by enacting highly punitive policies and laws and turning away from rehabilitation and reintegration.” Following a crime wave during the late 1980’s, the federal government and states across the country championed tough on crime laws and increased punitive sentencing. As a direct result, the American incarcerated population more than quadrupled between 1980 and 2005. This increase proved to be exceedingly racially disproportionate, to the extent that, according to the Federal Bureau of Justice Statistics, of white males born that year, 5.9 percent would serve a term in prison, however 17.2 percent Latinos and a horrific 32.2 percent of black males can expect prison sometime in their lives.. Goldsmith continues “Prisons across the country now look like African American and Latino storage pens.” Statistics, reveal the extraordinary extent to which these policies were and are disproportionately affecting minorities; more African American and Latino men in their twenties are in prison or jail, on probation, or on parole than in college. Extensive literature exists documenting and establishing how policy is often written and executed with the objective of subjugating and crippling minority communities. Many examples emerge with policy formation, such as the infamous 100-1 crack to coke ratio, and policy execution, for example, that a severe penalty for marijuana possession is seven times more likely than one for drunk driving. Civil rights groups frustrated with these inconsistencies and their devastating effects have long been at the forefront of the legalization movement.
California, successfully lobbied by civil rights groups, provided a provision allowing for offenders to expunge marijuana offenses from their records, however the process requires the offender to hire a lawyer and navigate toilsome bureaucracy. Many argue this is an unreasonable barrier for those who have lost years of their lives for ultimately no reason. In the summer of 2019, a bill was introduced in the California Senate which would automate the process and expunge the records of over a million residents instantly, however the bill has yet to become law.
An Unfair Regulatory Apparatus
The moment Proposition 64 was approved by the residents of California, a process just as consequential began within the legislature. The state began a two-year legislative process hearings, testimony, and policy formation, with the goal of successfully implementing policy which honored the popular vote, retained the safety and wellbeing of all residents as best as possible, and smoothly transition the state from one in which marijuana was illegal to one where it is legal. Ultimately, the state determined the optimal solution to executing the will of the people was through a new licensing system for growers and an expansion of the dispensary license system from medicinal to general dispensaries.
Instead of a centralized regulatory apparatus, individual state agencies established regulations, including the State Water Resources Control Board, the California Department of Fish and Wildlife, the California Environmental Quality Act, and the Department of Pesticide Regulation. On top of agency regulations were requirements to comply with all county and municipal regulations, including land use ordinances. Hekia Bodwitch explains “ Once growers have obtained a license for cultivation, they must, among other requirements, tag all plants with radio-frequency identification tags to track the product from its point of origin to commercial sale, maintain 24-hour video surveillance of all plants, record the names of and timestamp all individuals who enter the fenced cultivation area and report the weight of any discarded plant material”. Further, Bodwitch adds; “Prior to sale, growers are required to hire third-party testing laboratories to confirm that their crop meets quality assurance guidelines for cannabinoid levels, moisture content, residual solvents and processing chemicals, pesticides, microbial impurities, foreign material, terpenoids, mycotoxins and heavy metals, plus cannabis must be transported to testing and dispensaries by licensed distributors.”
The result is a costly and burdensome regulatory system. Beyond decentralization and redundancy, this system is partially a result of the inadequate research around cannabis cultivation. Unlike other cash crops, cannabis must be tested for a wide range of contaminants because we simply don’t know enough scientific information on cultivation and its effects on the human body. The result is excessive testing costs— “$500 to $1,000 per batch, and most crops involve multiple batches,” said Gieringer, director of California NORML. “No other agricultural product is required to undergo such costly or sensitive tests.” Regulation heavily concentrated upon cultivators, rather than distributors, lead to uneven distribution of opportunities and risk across the industry.
Over taxation Across the Board
Another facet of marijuana legalization which garnered significant media attention in the years before and following legalization was the corresponding tax code. One of proponents most prominent arguments laid with the potential revenue for every level of government. Upon the conclusion of the aforementioned two-year period, the state determined that revenue would be generated separately at state and local levels. Consequently, take the example from Javier of Montes, a cannabis store owner from Wilmington, California, who received his city and state licenses in January 2018. Montes claims his business faces a 15% state excise tax, a 10% recreational marijuana tax by the city of Los Angeles, and a 9.5% in sales tax by the county and state, culminating in a markup of more than 34%. California opted not to include in legislation a tax cap, unlike Oregon, where cumulative marijuana taxation cannot exceed 20%.
Again, the previous issue of federal inconsistency reemerges. While cannabis’s status as an illegal substance renders marijuana enterprises ineligible for federal tax deductions, the federal government still requires, by law, marijuana enterprises submit their tax statements. Consequently, the effective federal tax rate for legal cannabis businesses can reach 70% to 90%. Marijuana businesses paying federal taxes but remain ineligible for federal tax deductions demonstrates how this fundamental contradiction results in obviously bad policy. As of 2019, neither California nor the Federal Government has acted to address the resulting consequences for marijuana enterprises.
As a direct result of the culminating over taxation, industry experts estimate that licensed cannabis sales of about $3 billion in California in 2018 accounted for only about 20% to 25% of all the marijuana purchased in the state. These estimates are consistent with contemporary economic theory, which predicts if products are not properly priced (and taxed), the legal and illegal market will continue to coexist. Further, in periods of oversupply and low prices, such as California today, larger enterprises are able to withstand the shock while smaller firms are driven out of business. Market consolidation, a popular fear of many within the legalization movement, is a potential result.
The Local Veto Conundrum
A last important facet of cannabis legalization lays with the distribution of authority. When advocates for legalizing marijuana in California drafted Proposition 64 before 2016, they made an important concession to win the support (or at least minimize the opposition) of local government and law enforcement groups: cities and counties would be allowed to ban marijuana-related businesses entirely if they desired. As a result, roughly 75% of local governments and 80% of municipalities have outlawed stores selling cannabis. Some adopted the position as a result of a wait and see approach, while others outlawed the retail because of a fear of the drug and possible associated crime. Unequal access to cannabis has resulted in many consumers returning to black markets. This remains a difficult policy to reverse without enraging local jurisdictions across the state.
V. THE RESULTS: CALIFORNIA TODAY
“California seems like a bastion of liberal ideals and progressive policies. No one was surprised that the state decriminalized marijuana for medical, and then recreational, use. However, when taking a closer look, it is apparent that California is a state of variable attitudes and morals with a penchant for local control and an ineffective legislature. Add to that an enormous cannabis industry that has been growing in a gray market for nearly two decades and the money and power that comes with the promise of a global market share, and the issue of cannabis legalization in California is exposed for the tangled web it really is.”
“The problem California’s legal cannabis industry faces is unique. We didn’t have a blank chess board like other states had,” he said. Instead, California inherited a patchwork of legal statuses — varying from county to county”
All things considered; legalization has not achieved the outcomes many proponents promised in 2016. Proposition 64, while successfully legalizing marijuana, failed in the overarching goal of delivering consumers from the high costs and safety concerns of the black market and the criminal justice system. Complex, expensive, and disproportioned regulations, compounding taxes and decisions by most local government to ban the sale of cannabis, have all allowed for the black market to survive and flourish. Most sales remain from illegal, unlicensed vendors, contributing to a disappointing first year of tax revenue. According to an anonymous 2018 survey of marijuana growers, 31% reported they had not applied for cultivation licenses. The three reasons for not doing so most often cited were costs, regulatory inconsistencies, and alterations necessary to production practices. While advocates expected $1 billion in revenue, 2018 provided a meager $471 million, according to state officials. The state amended its plans and extended the period that growers and sellers can operate with provisional licenses by five years, interpreted by many experts as a sign of a market in trouble.
Other externalities have emerged as well, notably the harm to incredibly important and vulnerable small marijuana enterprises. A small grower from Humboldt County explains, “There was a pretense at both county and state levels of recognition that the transition to ‘legal’ pot should allow time for small producers to adapt, because the economic effect of wiping them out would devastate communities across the state”. Barriers, high costs, and uncertainty provide large growers an advantage while pushing small growers either out of business or underground. Another advantage for larger, established enterprises is that cannabis cultivation is a relatively capital-intensive industry compared to other cash crops. Further, the burden of compliance shifts lucrative profit-making opportunities from producers to non-producers. All of these factors contribute to fears of the future advent of Big Marijuana— the rise of national and perhaps eventually multinational corporations.
Early demographic trends of the nascent marijuana economy reinforce aforementioned fears. The market is increasingly dominated by well-financed white men. While this is not atypical of most industries in America, it is a far cry from the demographics of those who typically work in the illicit cannabis market, both in other states and in California before legalization. Given the incredibly racialized history of marijuana and the devastating War on Drugs, many, especially in the area of racial justice, believe those targeted by the last 50 years of drug policy and those communities most affected should be first in line to run the industry and profit from legalization. While constitutionally, California could never have hand-picked minorities to profit most, the many aforementioned barriers have all contributed to the exclusion of minorities from the new economy.
VI. THE FUTURE OF CALIFORNIA MARIJUANA POLICY
The transition from treating Marijuana as a Schedule 1 drug to widespread legalization was always a momentous task. Public policy, especially at the State level, is largely a matter of incremental policy shifts. That said, it is not unfair to say that, as of 2019, California’s implementation of Proposition 64 has been, by most accounts, poor. Careful analysis, reveals careful policy adjustments which can dramatically improve outcomes for marijuana enterprises and the people of California alike. Below are ten policy recommendations for various levels of government.
a) The first, and most pressing policy is for the State of California to automatically expunge the records of past nonviolent marijuana offenders. Doing so represents a moral obligation, both to the person, and for racial justice.
b) Second, until the nascent industry has stabilized and claimed greater market share from the black market, the State of California must lower statewide taxes which contribute to legal vendor’s inability to compete. Further, the state should enact a long-term cap on cumulative taxes.
c) the most effective step for the State of California to revive small and middle-sized marijuana enterprises is to establish an apparatus to provide the financial services to marijuana businesses they are currently excluded from by the Federal Government.
d) establish funding for potential incentive policy mechanisms: such as tax credits, crop insurance, and small business development grants, so as to ease the transition for former actors from the black market.
e) facilitated more research on the health effects, health regulations, growing practices. Investigate interdisciplinary effects, such as marijuana accessibility reducing education attainment and the potential decrease in the use of opioids among marijuana users.
f) The California Legislature must officially recognize the importance of small businesses and businesses of color and develop action plans to improve outcomes for these groups.
g) Streamline regulations and shift the resulting burden to achieve a more equitable balance between growers to non-growers.
h) Local governments must realize their contribution to the black market’s success to allow deliveries and pot shops within their jurisdictions. Failure to do so must result in state action to allow deliveries statewide and improve access for all Californians.
i) Cap the potency of products to reduce rates of dependency.
j) Polls demonstrate the majority of Americans now support the legalization of Marijuana. The Federal Government must move to legalize the drug nationwide, learning from the policy failure of California, so as to treat all Americans equally under the law.
California has long been the center of the Marijuana world; however, the State is not impervious to misaligned incentives and policy failure. Three years since Proposition 64’s passage, marijuana has become legal and safe marijuana to many Californians, however policy failures across all levels of government have produced an undesired situation which threaten the industry and the very Americans Proposition 64 hoped to help. Due to the federal government redistricting financial resources to marijuana enterprises, incarceration as an issue largely being ignored, a decentralized regulatory apparatus which overly burdens growers rather than non-growers, compounding taxation at every level of government, and local jurisdictions retaining the ability to restrict marijuana access to many Californians, the State has largely failed in its objective to corral the black market into the formal economy, resulting in disappointing revenue for the State and a devastated small business class. Many policy adjustments, some included, could potentially work to alleviate the issues facing this industry, however what is certain is that the status quo remains unsustainable.
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