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Pot: If California lights up, how the rest of the country may follow

When it comes to legalizing marijuana, California is the 800-pound joint in the room.

The Golden State is the largest pot producer and consumer in the country, legal or otherwise. It was the first to legalize medical marijuana 20 years ago, and now voters will decide on Nov. 8 whether to allow adults 21 years and older to consume cannabis for any reason.

Eight other states from Arizona to Maine will also vote to legalize marijuana in some form or the other, even though the federal government still puts pot in the same category as heroin.

"The nation will wake up," said California Lt. Gov. Gavin Newsom, who helped author the state's Prop 64. "The bottom line is the country will radically change because of what California is doing."

Napster co-founder and former Facebook President Sean Parker has put more than $7 million behind Prop 64. A recent Field Poll said Californians support passage by a 2-to-1 margin.

This is six years after they rejected a legalization measure which critics called vague. Since then a handful of states have pushed through legalization, and Newsom said the lessons learned in places like Colorado and Washington helped form the new proposition. (By the way, he's never smoked a joint in his life. "It's interesting, no one believes that, and I lose credibility.")

Even now however, not everybody in California supports legalization. Some of the loudest dissent is coming from a surprising corner: growers. "I'm starting to lean a little bit more toward the 'No,'" said Sequoyah Hudson of True Humboldt, a consortium of farmers in Humboldt County, home to some of the most famous marijuana in the world. In this part of California, pot has long been the silent backbone of the economy.

How a Prop 64 will work

California's Proposition 64 will allow adults 21 years or older to possess up to 1 ounce of marijuana at any given time, or 8 grams of concentrate, and people will be allowed to grow up to six plants. Commercial retailers and manufacturers will need to be licensed and cannot be located near schools or child care centers. Sales will be subject to a 15 percent state tax, though there could also be local taxes.

Growers will be taxed $9.25 per ounce of marijuana flowers and $2.75 per ounce of leaves (leaves are used to make extracts, an increasing popular form of marijuana consumption). Taxes would kick in Jan. 18, 2018, giving the state plenty of time to get the program up and running.

Local municipalities could restrict marijuana businesses even further, or even ban them outright, but they cannot ban individuals from growing their own six plants.

There are 62 pages of rules in the proposition, but the hope is that legalization will lead to a huge payoff. Analysts estimate the pot market in California is somewhere between $9 billion and $13 billion a year, and taxes could reach $1 billion.

The taxes will not go into the general fund, however. "We didn't want to create a reliance on the revenue," said Newsom. "We're not here to generate revenue off of people using any kind of drug ... I'm just anti-prohibition."


So where is that $1 billion in tax money going?

Instead, taxes will be separated into buckets, including money for enforcing the law ($15 million alone for the California Highway Patrol to develop a protocol for driving under the influence), plus funding for programs helping communities harmed by the war on drugs — including grants to help them get into the legal marijuana business.

Some tax money will go to fix environmental damage caused by illegal grows, and some will go to the University of California at San Diego to study the effects of pot on motor skills and health.

For people directly involved in this business, marijuana finally coming out of the shadows and into the light is both exciting and terrifying.


The growers: "No more cutting corners now."

"Growers do want legalization," said Hudson of True Humboldt. "It's how it's legalized, and how access is provided, and what we're willing to give up in order to get that." She doesn't think Prop 64 is adequate, because it limits possession. She plans to vote 'No,' and worries that longtime locals will be forced out of business. "There's the fear that it might be the ones with all that big money that are trying to come in and really take advantage of this opportunity."

Fear of outsiders is huge, so to give existing farmers a head start, Prop 64 limits the size of licensed grows to no more than an acre for the first five years. After that, the cap on real estate lifts, and no one knows who may move in. "I think there's going to be a period of time where the prices are really going to go low, and it's going to be about the ones that survive," said Hudson.

The truth is, outsiders are already here, and no one seems to like it. In downtown Garberville, one local man yelled, "Get the f--- out of town!" to a group of "trimmigrants," the name for transients moving through looking for cannabis harvesting work. Crime is up, and longtime residents grumble about Eastern Europeans who have moved in and keep to themselves. "Be careful going down some roads, you might see a guy in an Adidas suit with a gun," one warned me.

However, some growers are coming out in support of Prop 64. They tend to be younger, second-generation farmers like Sunshine Johnston and Rio Anderson.

"The more I learn, the more I like it," said Johnston, owner of Sunboldt Grown. "We haven't had a future until now, and now we have a future." She points to a medical marijuana product she's selling which has the first-ever county agriculture stamp of approval after officials inspected her farm. "In the past as growers, we could cut corners, but there's no more cutting corners now."

Anderson said it's time for legalization, even if the proposition isn't perfect. "I'm excited about it, really excited," he said. "I feel like I'm ready, I've been doing all the permitting work, I'm working with a CPA getting my taxes in order, running it in a legitimate way." He's even hoping he can finally get a bank account, something which remains difficult in the industry.

Johnston's main concern, however, is the 1-acre limit on land, especially in the face of the current glut of pot.

"The most that has ever been grown in the state of California was this year," she said. That has prices falling. While Johnston supports the cap, "The problem is the tax burden is fully carried by the farmer and we are price takers and can not raise our prices, we can not grow more or seek out of state markets if we have trouble paying taxes." Her solution is to focus on a premium product with higher margins.

Anderson is hopeful that legalization will allow people to speak openly of what they do for a living. "The black market has kind of taken away our right to speak out and do interviews like this," he said inside a covered grow facility bursting with cannabis ready to harvest. "Legitimacy has given me a chance to come out and be part of the greater society."


The retailers: "I personally think it's communism."

Kiva Confections in Oakland, CA
Source: Jill Silvestri
Kiva Confections in Oakland, CA

Get ready for the five-star treatment if recreational "adult use" pot becomes legal. "I like clean," said Darice Smolenski, who opened The Reserve in Orange County seven months ago with her husband. Two hundred medical marijuana customers come through here daily, and start-up money includes an investment from musical artist The Game.

Smolenski is preparing for expansion if Prop 64 passes. "I wanted a clean and professional place," in order to make customers feel comfortable, she said. The Reserve has white walls and modern lighting. "It's like an Apple Store with a spa."

Up north in Oakland, the City Council is also preparing for Prop 64's passage. The council is about to vote on a measure to provide business permits and financial help for residents denied access to the legal pot industry due to drug convictions.

Those plans may backfire, however, by infuriating established cannabis businesses.

"We are considering moving," said Kristi Knoblich Palmer, co-founder of Kiva Confections, which manufactures pot-infused chocolates and employs about 50 people in Oakland.

Hers is one of an estimated 90 cannabis operations in the city, but under Oakland's proposal to help newcomers with past records, companies like Kiva Confections would have to pay a 25 percent special tax and give the city a seat on their boards.

"I personally think it's communism," said Dona Frank, managing member of Oakland Organics, a medical dispensary which could also face the same tax and board seat demand.

"I really don't think that it's legal." Knoblich Palmer agrees. "No one that I've ever spoken to can point to another industry across the nation, in any other state, any other sector of business, that this is also being applied to." (CNBC scheduled an interview with a city councilman supporting the measure, but he was over an hour late and we missed that opportunity.)

The City Council will consider the measure next week, and Frank said if it passes, there will be lawsuits. "Uber just moved in down the street, and I'm wondering, did they tell Uber that they couldn't come unless they gave the city of Oakland 25 percent of their business and had somebody sit on the Uber board? Could you imagine that?"


The entrepreneurs: "The new face of cannabis"

Finally, the Green Rush has been bringing people west ever since Colorado legalized recreational pot in 2014. Now, many entrepreneurs are putting down stakes in California. Earlier this month, the New West Summit was held at the Hyatt in San Francisco's pricey financial district.

Vendors highlighting the latest in marijuana technologies packed the expo. Jim McAlpine created the event. "I'm trying to put a new face on what cannabis is," he said.

McAlpine also runs the 420 Games and Power Plant Fitness, a cannabis-friendly gym he is building in San Francisco with former NFL star Ricky Williams. As an athlete, McAlpine said it's critical that after legalization, people learn how marijuana affects them.

"I like to consume before I go swimming," he said. "For me, that's really helpful. About halfway through the swim I get bored, and it kicks in and it gives me focus. The guy next to me might drown because he ate that cannabis, so it affects everyone differently."

At the same time, publicly traded companies like Scotts Miracle-Gro are highlighting products which can be used in growing legal marijuana, and Microsoft invested in Kind Financial, a tech company to help cannabis companies track from "seed to sale" for compliance purposes.

Newsom expects more innovation and investment. "In Silicon Valley, of course, it's been always about disruption. There's a libertarian notion in the Valley. Folks are about social justice and freedom."