Marijuana grows at the Perennial Holistic Wellness Center dispensary in Los Angeles in July 2012. (David McNew, Getty Images)

Why marijuana legalization vote in California may herald end of prohibition era

Approval of recreational marijuana in all five states, along with the medical measure in Florida, will add $7.8 billion annually to the $7 billion market by 2020

U.S. voters next month in five states, including bellwether California, are poised to expand the legal use of recreational marijuana to almost a quarter of the American population, a move that could prove to be one of the most consequential shifts in U.S drug policy since the 1930s.

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Passage in California, where polls show it has wide support, would make pot legal along the entire West Coast and give momentum to efforts to lift the ban nationwide. The state, the most populous in the U.S. with 39 million residents, was the first to allow medical marijuana two decades ago. In all, nine states will consider marijuana-related ballot measures on Nov. 8, which could more than double the $7 billion market for pot products by 2020.

“If this passes in California, and particularly if it passes in the other four states, it’s lights out for marijuana prohibition,” said Troy Dayton, chief executive officer of The Arcview Group, an Oakland-based firm whose 550 investor members have poured $85 million into 131 cannabis companies.

Attitudes toward marijuana legalization in the U.S. may have reached a tipping point. Opinion polls show a majority of Americans support it. That’s a dramatic shift from decades past — partly the result of a new generation reaching voting age and nearly half the adult population trying pot.

Failed drug policies that jail nonviolent users and growing evidence that it’s less harmful than cigarettes and alcohol have fueled calls for a change.

Law enforcement and medical groups are among those opposing legalization, citing increases in cannabis-related traffic deaths and pot use by minors in states that allow it, such as Colorado, where dispensaries outnumber Starbucks cafes. While President Barack Obama’s Justice Department in 2009 told federal prosecutors not to pursue criminal charges against people who use or supply the drug for medical purposes in states where it’s legal, it’s still considered a controlled substance under federal law.

Colorado and Washington paved the way for legalization in 2012, and Oregon and Alaska followed in 2014. It’s also on the ballot in Massachusetts and Maine, as well as Arizona and Nevada, home to Las Vegas, which draws more than 41 million tourists a year. Half of U.S. states allow medical use of marijuana, and three more, including Florida, look to add to that tally.

Legalizing marijuana in Massachusetts means it may be available in Boston — a major hub along the Northeast corridor, a train ride away from Manhattan and the first major market for legal pot on the East Coast.

Californians have rejected recreational marijuana twice before, in 1972 and 2010. Support has swelled this time, with 60 percent of likely voters saying they will approve it compared with 50 percent six years ago, according to a September Field Poll.

Sean Parker, the billionaire former president of Facebook, has donated $8.8 million to the campaign to pass legalization in California. It’s supported by the state’s lieutenant governor Gavin Newsom. California Sen. Dianne Feinstein, a Democrat, opposes it.

Expanding recreational marijuana comes with risks, opponents say. Pot use in states where it’s legal has led to higher arrest rates of minors and more pot-related hospitalizations, according to an October report by Smart Approaches to Marijuana, an Alexandria, Virginia-based group opposing legalization.

“The thrust of these initiatives is not personal liberty and social justice, it’s really money,” said Jeffrey Zinsmeister, the group’s executive vice president. “It’s an addiction-for-profit model that’s being sold to voters. Their profits depend on selling as much of an addictive product as possible.”

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If approved, the California measure would levy a $9.25 per-ounce tax on cultivated pot and 15 percent sales tax on marijuana retail products. Local governments could tax even more.

Legalization and taxation in the Golden State could eventually generate at least $1 billion in annual revenue for California and its municipalities and has already fueled an industry ready to take advantage of the market for pot products.

“We’re in this transition from the legacy world of commercial marijuana — legal, quasi-legal, gray market, illicit — to the future, which is fully institutionalized,” said Adam Bierman, CEO at MedMen, a Los Angeles-based cannabis management company which in June announced the MedMen Opportunity Fund, a $100 million investment fund.

Still, marijuana remains an illegal substance under federal law, creating gray areas for pot businesses operating in states where it’s allowed. U.S. banks citing the federal law have refrained from doing business with pot establishments, even though the U.S. Treasury Department in 2014 issued guidelines allowing them to offer accounts and other services.

That’s left sellers to operate as all-cash businesses and use cash to pay thousands in state and local taxes and fees each month. Pot advocates say additional states legalizing the drug may put pressure on Congress to remove the designation.

Approval of recreational marijuana in all five states, along with the medical measure in Florida, will add $7.8 billion annually to the $7 billion market by 2020, Arcview’s Dayton said. California already makes up less than half of the total U.S. market and the addition of recreational use will bolster economies of scale for the industry, he added.

“There’s a whole swath of investors that have been looking in Colorado, Washington, Oregon and Alaska and saying ‘OK, interesting,’ but when California passes, that’s going to be go time for a lot of people,” Dayton said.

Bloomberg’s Jennifer Kaplan contributed.