• Analysis and comments on Hawaii SB 375
  • Feb. 15, 2023, comments are here (pdf).
  • March 1, 2023, comments are here (pdf).

• Analysis and comments on Hawaii SB 669
  • Feb. 15, 2023, comments are here (pdf).
  • March 1, 2023, comments are here (pdf).

The post Comments and analysis of legal marijuana proposals and regulation in Hawaii’s SB 375 and SB 669 appeared first on Reason Foundation.

While state cannabis legalization proposals have evolved and improved in many ways in the decade since Colorado and Washington voters approved the first adult-use markets, some mistakes have also been replicated from state to state.

Here are three common mistakes seen in statewide proposals being considered this year.

Social equity plans are poorly designed to achieve nominal goals 

Advocates for social equity within the cannabis industry argue that restorative justice measures are necessary to compensate for decades of discriminatory government action during the drug war. President Richard Nixon’s administration admitted racist motives in pursuing and promoting the drug war, and there is a lot of statistical support demonstrating that the drug war has been prosecuted in discriminatory ways. 

However, most social equity plans found within this year’s state legislative proposals fail to target relief toward actual victims of the drug war—those who were arrested or convicted and have borne the collateral consequences of those convictions, such as barriers to employment, higher education, or small business loans. Instead, they create loopholes that allow third parties to intercept the benefits intended for these victims. These programs do not restrict eligibility to those arrested or their immediate families. Instead, a person can qualify to intercept benefits intended for these victims if they lived in a neighborhood where others were arrested or if they agree to hire entry-level employees from this neighborhood, regardless of whether those hired suffered any damages from the drug war.  

Such broad eligibility parameters allow social equity programs to be manipulated. Illinois offers a cautionary example. Illinois’ only operating social equity dispensary is owned by “wealthy and connected” insiders, according to the Chicago Tribune, including a retired city narcotics detective. Their dispensary opened recently in the affluent River North area of Chicago. This group qualified as a social equity licensee simply because they pledged to hire at least six employees from neighborhoods with historically high arrest rates—even if the specific employees hadn’t been arrested.

States should rethink legislative language allowing non-victims of the drug war to intercept cannabis business licensing preferences or other relief measures intended for victims of the drug war.  

Better yet, states should avoid capping the number of business licenses available and minimize fees so that individuals with modest means can afford to compete. Current legislative proposals would erect substantial barriers to entry into the legal cannabis marketplace, including a limitation on the number of licenses and exorbitant licensing and application fees. The well-heeled tend to dominate when marijuana business licenses are limited. As former Minority Cannabis Business Alliance Executive Director Amber Littlejohn says, “The best thing you can do for social equity is open up the market.” 

New York’s experience shows that high barriers to entry can impede the transition of legacy suppliers to the regulated marketplace and result in the perpetuation of the drug war. There, state and local authorities have begun a broad campaign to arrest unlicensed cannabis retailers or seize their assets. Meanwhile, barriers to the legal market are so tight that regulators only approved 36 dispensary licenses statewide despite receiving 900 applications, and the first legal location didn’t open until nearly two years after authorizing legislation passed. 

Current legalization proposals in Delaware, Hawaii, Maryland, Minnesota, and Nebraska would replicate these flawed approaches. Instead, states should restrict the eligibility for social equity criteria to direct victims of the drug war or their immediate families and minimize barriers to entry into the legal marketplace. 

Residency requirements for licensure are unconstitutional 

Federal courts have been clear that the states that condition cannabis licensing upon an applicant’s residency within the state run afoul of federal Dormant Commerce Clause provisions that prohibit state-imposed barriers to the free movement of people and capital. Courts have already struck down residency requirements in Maine and New York on that basis, while Colorado and Oregon proactively repealed their requirements. Still, state residency requirements or preferences have been included in current cannabis legalization proposals in Iowa, Nebraska, New Hampshire, and Tennessee. 

Labor peace agreements cannot be required as a condition of licensure 

Federal courts have also been clear that the National Labor Relations Board has exclusive jurisdiction to regulate private-sector labor relations. In 1986, the U.S. Supreme Court specifically ruled that issuance of a privileged type of business license could not be conditioned on the applicant signing a labor peace agreement. While California, Illinois, and New York have unlawfully imposed this requirement, Michigan regulators abandoned the proposal after hearing testimony from Reason Foundation. Current proposals in Delaware, Hawaii, and Minnesota would make this mistake. 

While states should legalize cannabis, experience in states that have already legalized shows that flawed legislation and regulatory rules can cause the resulting legal marijuana markets to struggle. Additionally, some legislative flaws invite lawsuits that could imperil or delay adult-use marijuana markets.

Many of the current marijuana legalization proposals being considered by states across the country could be strengthened by correcting these common mistakes. 

The post Three common mistakes in cannabis legalization proposals this year appeared first on Reason Foundation.

Full Analysis of House File 100

The post Testimony: Cannabis labor peace mandate in Minnesota HF 100 violates federal law appeared first on Reason Foundation.

President Biden’s announcement prompts a look at the fascinating economics of the rapidly-evolving U.S. cannabis industry. As of this writing, 19 U.S. states and the District of Columbia have legalized recreational or adult-use cannabis, while 19 more have legalized the medical use of cannabis products. Sales from those legal markets reached $25 billion in 2021, with that number expected to grow substantially in the coming years. 

The U.S. cannabis industry is characterized by explosive growth, innovation, entrepreneurship, and extremely rapid proliferation in the number of products available. These features make it resemble the initial booms often seen in high-technology markets. However, the U.S. cannabis industry is also characterized by heavy-handed, highly inconsistent, and sometimes arbitrary regulation and taxation among the 19 states that have gone the full distance of legalizing adult use. The collision of these two factors is producing unusual results that should be of interest to economists for many reasons.  

As the market matures, the regulatory regime currently in place threatens to stifle producers and retailers from offering affordable products and products consumers want. It also threatens to impede further progress in criminal justice reform and much-needed changes of course in the war on drugs. 

A Bubble Inflates 

The dramatic reductions in cannabis prohibition at the state level over the last decade seem to have sparked an entrepreneurial boom in experimentation that may look familiar to those who remember the wild-west days of the early internet or the more recent explosion in cryptocurrencies and blockchain-based applications. 

Even two decades ago, cannabis enthusiasts who purchased the product from a dealer or friend were more likely than not to simply identify the product as marijuana. Savvy customers and growers were aware of broad distinctions, such as the two major subspecies of the cannabis plant, indica and sativa, and that cannabis from different sources might have different effects, smells, and tastes. Most marijuana sold on the black market was entirely unlabeled, so the best consumers could do in determining what was in their bag was an educated guess. The black market in marijuana was highly lucrative, but innovating and differentiating products were often not. 

A baby boomer who experimented with marijuana in their youth before putting the substance down might be surprised to walk into today’s regulated medical and recreational facilities, where they would be faced with the choice of dozens or hundreds of so-called strains produced by selective breeding in the also-booming cultivation market. Choices for cannabis flower alone might include strains with names like Ghost Train Haze, Girl Scout Cookies, Facewreck, and yes, even Sleepy Joe. 

While most consumers agree different strains can have different effects and tastes, the descriptions at one’s local legal dispensary can be extremely detailed but also highly subjective, without any single or a small number of trusted sources to verify or standardize these claims. We are told, for example, that for Ghost Train Haze, “low doses are conducive to concentration and creativity, but you may notice some cerebral haziness as you smoke more.” Girl Scout Cookies marijuana apparently “catapults you into a wave of euphoria and tingles that encapsulate your body with very little effort. These ultra-powered buds will have you questioning space and time, while utterly gluing you to your seat.” 

Just how many strains are there in 2022? Industry watchers appear to have lost count. “Over 700” is a figure often cited in the media. Cultivator and distributor Cresco Labs, on its blog, puts the number at “over 1,000.” Popular cannabis site Leafly lists over 3,600 known strains in its database. 

We still haven’t discussed the equally explosive proliferation of other types of cannabis products. Vaping (with parallels to a phenomenon in the nicotine market), has become popular through a wide array of different devices. Concentrates, relatively new on the scene, have become a major part of regulated dispensaries’ businesses, offering a host of different highly concentrated forms of THC potent enough that they are often not recommended for inexperienced users. Edibles, once associated with brownies made in a friend’s kitchen using leftover pot, are booming as well, with accurately labeled THC content and available as hard candy, gummies, chocolate, and beverages, to name a few. Finally, along with this boom has come a vast proliferation of cannabis accessories, from regular glass and water pipes to all manner of devices to vaporize cannabis flowers, THC oil, and concentrates. 

Many will look at this exponential growth in cannabis varieties accompanied by vague or dubious information about effects, not to mention a steady stream of new and expensive gear, and immediately think “bubble.” They are most likely correct. However, this needn’t be a bad thing or a sign of egregious errors made by entrepreneurs or investors. Entrepreneurs must experiment and compete in the market to learn what products consumers most want. 

But while the peculiar combination of U.S. cannabis legalization along with heavy-handed regulation may have been conducive to the experimentation phase of market discovery, the different regulatory hoops firms must jump through in different states may present big problems as the newly legal market attempts to consolidate what it has learned from this initial experimenting. 

A Discovery Process Interrupted  

The specific regulations and taxes that cannabis vendors face differ widely among the 19 states where cannabis use is currently fully legal. While some states have done a far better job at allowing a dynamic and affordable market than others, a constant is that cannabis is not yet treated like any other consumer product. 

Even classic so-called vice products like tobacco and alcohol, heavily regulated, can be found in special sections of gas stations, grocery stores, and Walmart (in most states). Consumers may have to show identification and navigate quirky legacy rules in some states, like not purchasing alcohol on Sundays. But shopping for alcohol and tobacco still mostly resembles the shopping experience to which American consumers are accustomed. 

In virtually all states with legal recreational cannabis, the only way to buy that legal product is through dispensaries, usually small businesses that have gone through the state’s detailed if not arduous licensing process. Smoke and vape shops often specializing in selling all those new accessories usually do not qualify, and your local grocery store or Walmart will likely not have a cannabis section in any state any time soon. 

While sales taxes charged by states are highly varied, they almost always exceed those charged on virtually any other product. Tax regimes by states are a labyrinth of different rules and formulae, making comparisons difficult. Reason Foundation’s Geoff Lawrence and Spence Purnell estimated an apples-to-apples comparison of the taxes someone would pay on a pound of marijuana bought at retail, and the differences across states are striking. Illinois, the highest-taxed state at the time, charged more than double the tax of Michigan, only a short drive away. 

Tax rates are not the only reason for high state-to-state variation in prices. Even before state tax, Lawrence and Purnell’s estimates of retail prices are higher in Illinois than in Michigan. What explains this gap beyond sales tax? 

Michigan’s licensing process for legal marijuana dispensaries is far more open than Illinois’. The somewhat startling result is that Illinois has 110 retail stores working with 21 growers, while Michigan has close to 500 recreational marijuana stores working with over 1,000 growers. As The Chicago Tribune notes, Illinois may have had the best of intentions in its highly micromanaged licensing process, but has failed in practice: 

“Illinois was the first state to open a legal recreational market through legislation. That meant that lawmakers could write the law to promote greater diversity. But the law allowed a few existing medical cannabis companies to dominate the market. They got a nearly three-year head start selling adult-use pot while social equity applicants were delayed.” 

Both states appear to be taking steps to moderate their licensing processes, albeit in different directions. In July 2022, Illinois issued 185 new recreation licenses, in theory, more than doubling such dispensaries in the state, though those businesses are yet to open. Meanwhile, Michigan recently proposed a moratorium on new marijuana business licenses due to prices plummeting below levels where the business model can be sustained. Michigan’s cannabis consumers will still be served, though. In the fall of 2021, Ann Arbor, home of the University of Michigan, already had 24 operating dispensaries, while Champaign-Urbana, home of the University of Illinois, had four dispensaries. 

States are only now beginning to take steps to integrate cannabis with the existing retail market. Licensed dispensaries are almost all the same business type—small storefronts offering little or no shopping experience and highly restricted from selling non-cannabis products. This may be starting to change. Circle K and Green Thumb Industries recently announced a partnership to open medical dispensaries alongside 10 convenience stores in Florida. Leveraging both economies of scale and scope, such businesses may be far better equipped at times to service fast-growing cannabis markets at lower prices. 

This patchwork of fragmented state markets with high and complicated taxation and heavy-handed restrictions on who may and may not enter the industry will likely become a bigger problem as cannabis continues to become mainstream, more states legalize, and the market matures. It may have been relatively conducive to an experimental “wild west” phase of a market discovery process, but whether through bursting bubbles or smaller and slower corrections, a phase of consolidation is needed for a well-functioning market that provides affordable products that consumers want. 

Consider also the impact of sticking with a heavy-handed state-by-state regime on issues of criminal justice and equal access. In 2021, a whopping 70 percent of cannabis transactions in Illinois remained on the illicit market. Especially in the states that have legalized it but have high taxes and prices, many cannabis users simply cannot afford current legal marijuana prices at dispensaries. This population is also more likely to receive unfair outcomes in the criminal justice system. More small storefront dispensaries help, but especially as experimentation turns to consolidation, offering cannabis products at lower prices may be best handled by the types of businesses, like large retailers in many states that keep liquor in a special section and check IDs. 

President Biden has no power to harmonize or end state regulations, but the changes he announced at a national level are an occasion to take a hard look at how cannabis markets in the United States are evolving. Moving marijuana to a regulatory regime similar to alcohol will likely face substantial resistance. Some states will not want to appear soft on crime and drug use, let alone give up large sales tax rates. Cannabis growers and dispensary owners, who have often taken on an organic and localist aesthetic—and have now become the privileged licensed class in the industry—will howl at the thought of trying to compete with Walmart offering a budget line of marijuana. 

Progress related to marijuana legalization has been undeniable in recent years, and Biden’s announcement was a welcome one for cannabis users and entrepreneurs, as well as many others who care about criminal justice reform and ending the war on drugs. Ad hoc state markets, over-taxed and over-regulated, may have been the appropriate first phase for cannabis legalization in the United States, but a market that looks more like other products will soon be indispensable.  

The post Cannabis markets: Growth, innovation, and burdensome regulation  appeared first on Reason Foundation.

Those individuals carrying this conviction on their record face potential barriers to engaging in healthy and productive behaviors, including finding employment, attending college, or securing a home or small business loan. So, the mass pardons will accomplish a great feat for these individuals, even if the overall scope and depth of the pardons are limited. 

However, President Biden’s accompanying message and announcements could have much broader and deeper implications for America’s war on drugs and failed experiment with drug prohibition.

The vast majority of marijuana possession convictions in the United States are under state law. In his remarks, the president urged governors around the nation to take similar actions to pardon those convicted of simple possession under state laws. 

“Just as no one should be in a federal prison solely due to the possession of marijuana,” President Biden said, “no one should be in a local jail or state prison for that reason, either.”

Further, Biden revealed that he would direct Secretary of Health and Human Services Xavier Becerra and Attorney General Merrick Garland to conduct a review of marijuana’s scheduling status under the Controlled Substances Act. This directive could easily become the most consequential portion of President Biden’s actions.

The Controlled Substances Act directs the Department of Health and Human Services, in concert with the Drug Enforcement Administration, to control the manufacture and distribution of substances believed to hold some potential for abuse. The federal agencies divide these substances into five schedules, supposedly representing those with the most purported potential for abuse to the least. 

Marijuana, along with heroin and LSD, are Schedule 1 drugs, meaning the agencies believe they hold no medical value and a high potential for abuse. Those drugs are strictly prohibited in any form. Drugs in lower schedules may be available with medical prescriptions, as federal agencies have recognized some medical value for those substances. These include drugs like cocaine, methamphetamine, fentanyl, and hydrocodone in Schedule 2 and range down to anti-diarrheal medications in Schedule 5. 

In other words, the federal government’s official position is that marijuana is more dangerous than fentanyl. The Centers for Disease Control and Prevention (CDC), meanwhile, reports that fentanyl is 50 times more powerful than heroin and kills 150 Americans every day.

Moreover, the federal government’s outdated position that marijuana holds no medical value is patently absurd. A recent meta-analysis of medical research published by the Journal of the American Medical Association found marijuana can effectively reduce pain, vomiting, and cellular spasticity. Even the National Institutes of Health, a federal agency, now recognizes the effectiveness of cannabinoids in treating various medical conditions. It’s tough to conclude that marijuana fits the Schedule 1 definition in light of these and other facts.

This, along with the president’s urging, means it is likely marijuana could be assigned to a different schedule or de-scheduled entirely due to the review process. That change would effectively end the national experiment with marijuana prohibition, which was based from the beginning on misrepresentations and a desire to create a new role for federal bureaucrats who had just lost their role as alcohol prohibitionists.

Multiple proposals are circulating in Congress to direct federal agencies to remove marijuana from scheduling under the Controlled Substance Act. However, that feat would not require an act of Congress. The executive branch has always held the authority to reschedule or de-schedule marijuana on its own, either through the agency review process or by simple executive order. Congress has gotten involved only because the executive branch has not pursued either action.

A variety of drug policy reform groups and advocates note that Biden’s steps and pardons are important progress. That said, the Biden administration could have gone further and descheduled marijuana itself, but his initiation of the review process signals a major turnaround for someone who was once a primary sponsor of the infamous 1994 crime bill that stiffened penalties for drug-related offenses and significantly escalated the war on drugs. 

President Biden seemed to acknowledge this last week when he said, “Too many lives have been upended because of our failed approach to marijuana. It’s time that we right these wrongs.”

Biden’s pardons and review process are very positive steps, but there is still much more to be done.

The post Biden’s marijuana pardons are a good step, but descheduling marijuana would be a massive step appeared first on Reason Foundation.

The emerging coalition of states that have legalized marijuana seeking to allow for cross-border sales of regulated marijuana products represents a significant advancement in the development of a true interstate market. But there are caveats. The California and Oregon laws, and Sen. Scutari’s proposal, would require either Congressional authorization or a memorandum from the United States Department of Justice allowing for interstate transfers of marijuana products. 

At first blush, it may appear unlikely that the Justice Department would permit an interstate market in a federally illicit substance. However, this could be plausible for two reasons. First, the Justice Department is currently prohibited by riders to Congressional appropriations bills from using any resources to prosecute state-licensed marijuana businesses in good standing.  Although shipping regulated inventory out of state would violate existing state cannabis laws, these licensees would technically remain in good standing if the Justice Department allowed an interstate compact to take effect. As the First Circuit Court of Appeals recently pointed out, Congress has already recognized the existence of a national market in cannabis and decided not to criminalize it. 

Second, U.S. Supreme Court rulings have already held that Congress and the Justice Department can regulate or prosecute all marijuana transactions and that its jurisdiction does not begin when marijuana products cross state lines. Although this springs from a controversial interpretation of the Interstate Commerce Clause, the Supreme Court has applied it consistently since it ruled in 1942 that Congress could regulate a farmer’s ability to consume wheat grown on his own farm. In 2005, the Supreme Court applied this standard expressly to cannabis. Extending marijuana commerce beyond state borders implicates no more federal jurisdiction than currently exists within purely intrastate commerce.   

These provisions could lead the Justice Department to conclude it has no more authority to expend resources policing or prosecuting interstate commerce governed by an agreement between participating states than it does to police purely intrastate commerce. Based on Supreme Court precedent, it would imply no additional jurisdiction. 

However, it would be cleaner for Congress to expressly approve a plan to create an interstate market, whether by approving an interstate compact or by passing a more comprehensive approach, such as the States Reform Act (SRA). Indeed, regardless of what the Department of Justice thinks about an interstate compact, courts may soon conclude that interstate commerce must be permitted because state restrictions on the free movement of marijuana products violate the Dormant Commerce Clause.

The First Circuit Court just concluded, after all, that states cannot impede the free movement of persons and capital within the marijuana industry, and the same rationale might be applied to marijuana products. 

The systematic approach embedded in the States Rights Act would alleviate potential complications arising from an interstate compact or judicial decree, such as how regulated marijuana products could be transported between states, particularly when those states are not contiguous. It offers states the ability to set their own rules on cannabis but would facilitate trade among states that choose to offer a legal market through the federal Treasury Department, which would oversee the interstate transfers of products and ensure that these transfers cannot be stopped when moving across federally funded highways.  Provisions like this would ensure that the market is orderly and allow law enforcement to more readily identify illegal shipments of marijuana undertaken by criminal organizations and drug cartels. 

New Jersey’s consideration of an interstate market is particularly intriguing because, given geographic comparative advantages, it would almost certainly be a net importing state from lower-cost states with favorable climates like California and Oregon. According to data from New Leaf Data Services, those states offer the lowest wholesale cost of cannabis in the nation.  It should be expected, therefore, that they would become the leading exporters of cannabis products in the advent of an interstate market. 

Congress should act swiftly to implement an orderly interstate market through a vehicle such as the States Reform Act. Otherwise, a much less orderly approach may imminently emerge. 

The post States prepare for interstate commerce in cannabis  appeared first on Reason Foundation.

At the same time, the federal government takes in billions of dollars in tax revenue from these same state-legal cannabis companies. There are several bills sitting in Congress that would reduce the uncertainty these businesses face. For example, the proposed States Reform Act would drastically reduce the federal tax burden facing legal cannabis companies and help lay the groundwork for a stable, legal cannabis marketplace. 

The need for legislation like the States Reform Act stems from federal regulation that is in direct contradiction with state-level marijuana legalization efforts. Dating back to the Richard Nixon administration, the executive branch has chosen to classify cannabis as a Schedule I substance under the Controlled Substances Act.

This classification automatically invokes a number of other laws such as the Bank Secrecy Act, which make it difficult for financial institutions to service the accounts of even fully compliant legal cannabis companies. Perhaps even more significantly, the Schedule I classification makes state-legal cannabis companies subject to a provision in the federal tax code that disallows the deduction of expenses or the claiming of credits that are available to most other businesses.    

Whether filing as a partnership, corporation, or sole proprietor, most businesses may deduct expenses considered “ordinary and necessary” to carry on their trade from their gross income. These expenses may include lease payments, wages paid to employees, utility costs, advertising, and a wide range of other legitimate expenses.  Internal Revenue Codes 164, 165, 167, and 170 respectively allow businesses to deduct state and local tax assessments, prior-year net operating losses, depreciation, and charitable donations. Credits to offset net tax liabilities may also be available for domestic manufacturing, job creation, and a range of other reasons determined by Congress. 

However, none of these deductions nor credits are available to state-licensed cannabis companies due to Internal Revenue Code Section 280E, as amended by the Tax Equity and Fiscal Responsibility Act of 1982. Congress passed this act in response to a famous case where the Tax Court determined that a cocaine dealer could deduct his rent, telephone, and automobile expenses from the illicit income he claimed on his federal tax return. The act banned tax deductions and credits for all taxpayers that traffick in any Schedule I or II substance under the Controlled Substances Act (CSA), including cannabis.

As a recent report from the Congressional Research Service declares: 

Like non-marijuana businesses, marijuana businesses are subject to tax on all of their income. Under federal law, all income is taxable, including income from unlawful activities. In contrast, not all expenses are deductible from a taxpayer’s gross income. The Supreme Court has explained that tax deductions and tax credits are matters of “legislative grace.” Taxpayers conducting lawful activities may deduct “ordinary and necessary” trade or business expenses when computing their taxable income, and taxpayers may claim tax credits to the extent permitted by statute. 

Section 280E of the Internal Revenue Code denies tax deductions and tax credits attributable to the trade or business of trafficking in CSA Schedule I or II controlled substances where the trafficking is “prohibited by Federal law or the law of any State in which such trade or business is conducted.

As noted, under the Controlled Substances Act, marijuana is a Schedule I controlled substance. It is a federal crime to produce, dispense, or possess marijuana outside the context of federally approved scientific studies. Accordingly, Section 280E prohibits marijuana businesses from deducting expenses and claiming tax credits. 

The result of these laws is that legal, licensed cannabis businesses in full compliance with state laws face a financial penalty on federal income taxes. This penalty could result in large assessments even in years the licensed cannabis businesses suffer financial losses because they are taxed on a modified gross-receipts basis. By contrast, similarly situated businesses in other industries could not be pushed into the red by federal income taxes because they are assessed only as a percentage of net income. 

The financial impact of these provisions will vary by the business, but Americans for Tax Reform has estimated it results in income tax rates “close to 90 percent.”

Over 10 years, the Joint Committee on Taxation has estimated that these tax rates have generated $5 billion for federal coffers over and above what cannabis businesses would pay under normal tax rules, allowing Congress to benefit from the cannabis trade even as it declares that trade illegal.

Congress has authorized a series of budget riders that prevent the Justice Department from expending any resources to prosecute state-licensed cannabis businesses in good standing. 

Marijuana legalization proposals like the States Reform Act would remove cannabis from the federal Controlled Substances Act and allow cannabis businesses to claim deductions on the same basis as similarly situated businesses in other industries. This legislation would enact a federal excise tax on marijuana sales at 3%.   

The States Reform Act’s rates would represent a net tax cut for legal cannabis companies when considering the elimination of the income tax penalty under Section 280E of the Internal Revenue Code.

That change could also help to resolve the tax-induced price disparity between legal and illegal cannabis products that have allowed the illicit market to thrive even in the face of state-led legalization efforts.   

Congress should move ahead on much-needed marijuana legalization efforts. If it wishes to help establish an orderly, legal marketplace, it must also eliminate the federal income tax penalty and promote tax relief for legal cannabis businesses. 

The post State-legal cannabis businesses pay astronomically high federal taxes appeared first on Reason Foundation.

The history of drug prohibitions and enforcement efforts in the United States always reflects a kind of federalism in action. Because the federal government always lacks the resources and often the political will to fully enforce drug prohibitions nationwide, state laws and local practices will inevitably shape and color the full picture of U.S. drug policy and enforcement. When alcohol prohibition was written into our nation’s Constitution, for example, state and local officials embraced an array of different approaches to enforcing temperance, which produced a patchwork of on-the-ground practices across the nation.

In modern times, marijuana prohibitions and reforms present the most salient example of national drug policies reflecting diverse and sometimes clashing federal and state laws and local practices. Though some have explored how federal marijuana prohibition has shaped state reform efforts and local enforcement realities, few have focused attention on the most tangible and arguably most consequential aspect of federal enforcement, namely federal sentences imposed for marijuana activity.

Even while formal federal marijuana law has persisted unchanged amid state-level reforms, federal marijuana enforcement on the ground has changed dramatically. Drawing on data from the U.S. Sentencing Commission (USSC), this brief notes new federal enforcement patterns that have emerged in recent years.

The impact of marijuana prohibitions and the scope of enforcement are often documented through nationwide arrest data, in part because the numbers are enormous and in part because there is little other reliable national information on marijuana enforcement.

Yearly marijuana arrest data, as collected by the Federal Bureau of Investigation (FBI), are dynamic: as arrests for all drug offenses increased during the War on Drugs acceleration in the 1980s, the total number of possession and sale of marijuana arrests actually dipped due to a more aggressive focus on cocaine and heroin. Yet, as state marijuana reforms picked up steam, so too did total marijuana federal and state arrests—peaking at over 850,000 arrests in 2007 and averaging over 750,000 arrests annually for more than a dozen years. Starting in 2014, FBI data showed declines in total marijuana arrests and they reached a (pre-pandemic) low of under 550,000 arrests in 2019, and then hit another new low of just over 350,000 in 2020.

Disconcertingly, as the American Civil Liberties Union has documented, one pernicious consistency in marijuana arrest data has been racial disparities, with Blacks many more times likely than Whites to be arrested for marijuana possession.

While national arrest patterns tell one story, sentences imposed for marijuana convictions reflect the most significant consequence of marijuana prohibition enforcement. Disappointingly, there seemingly has been no systematic collection or analysis of marijuana sentencing outcomes nationwide since the work done by Ryan King and Marc Mauer through the year 2000.

Indeed, even with growing attention on marijuana reform, there are no recent data on how many persons nationwide are incarcerated for marijuana offenses nor any detailed accountings of the types of offenders still incarcerated for marijuana activities in the states.

However, data assembled by the USSC allow a close look at how federal marijuana enforcement has cashed out since the start of state-level marijuana reforms in the form of yearly sentencing outcomes.

Full Policy Brief: How State Reforms Have Changed Federal Enforcement of Marijuana Prohibition

The post How state reforms changed federal enforcement of marijuana prohibition appeared first on Reason Foundation.

In November 2014, police pulled over a disabled veteran in South Carolina for a minor traffic violation. After searching the veteran’s car, the police discovered small amounts of cannabis. Officers gave the veteran an ultimatum: help them or face stiff charges. Out of fear of criminal punishment, the veteran agreed to a controlled purchase of cannabis— roughly 100 dollars’ worth—from her friend, Julian, in Myrtle Beach. As a result, the police had enough information to establish probable cause to obtain a search warrant for Julian’s home.

A few months later, 12 officers from a multi-jurisdictional Drug Enforcement Unit (DEU) prepared to enter Julian’s home as part of “Operation Jules”—the nickname DEU used for the raid on Julian’s apartment. The officers, dressed in face coverings and camouflage, forced open the apartment door with a battering ram and eventually fired 29 bullets at Julian, leaving him paralyzed from the waist down.

As the result of the shooting and subsequent eight-figure settlement against the DEU and the City of Myrtle Beach, several changes to policing practices in the area were made. Specifically, the DEU stopped executing search warrants and using routine traffic stops to turn citizens into drug informants. While such policy changes should be lauded, reducing such overly intrusive policing tactics should not have to come at such costs.

The Myrtle Beach case encapsulates many of the problems with policing practices today: pretextual stops, militarization, and the overpolicing of low-level offenses.4 Although various policing reforms considered by lawmakers to address some of these problems may yield favorable results, such reforms fail to consider an essential aspect of modern-day policing—its inseparable link to the drug war. Because policing tactics are designed to maximize drug arrests and seizures, law enforcement initiates frequent and unwarranted contact with pedestrians and motorists. Such contact results in the overpolicing of minority communities, increased prison populations and jeopardized public safety.

Despite the interwoven nature of drugs and policing, drug decriminalization is not often considered a reform of policing practices. However, one could argue that decriminalization should be understood as a vital tool in limiting intrusive policing practices. Drug decriminalization is typically defined as a law that removes criminal sanctions for acquiring, possessing, or transporting small quantities of drugs for personal use and replaces them with civil sanctions.

This paper adopts that definition with two additions. First, the definition includes only decriminalization laws that have been considered by courts to limit police investigative authority—i.e., laws that affect police ability to establish reasonable suspicion or probable cause. Thus, state decriminalization laws that permit custodial arrests for civil drug offenses are not included.

Second, the definition also includes cannabis legalization. The definition does not include removing criminal sanctions for the production, distribution, or sale of drugs.

This paper proceeds in three parts.

Part 2 discusses the substantive reform arguments and approach to the decriminalization debate.

Part 3 explores how drug decriminalization affects policing practices. Specifically, it describes how drug decriminalization affects police authority to expand stops, conduct searches, and make arrests for drug possession. To illustrate these effects, three case studies are examined: New York, Oregon, and Colorado.

Part 3 also examines how drug decriminalization affects departmental incentives to conduct pretextual stops and militarize police personnel and divisions.

Lastly, Part 4 acknowledges and addresses how implementation issues with decriminalization affect policing practices.

Proponents of drug decriminalization typically emphasize the reform’s utilitarian potential to reverse mass incarceration trends, reduce racial disparities within the justice system, and minimize the economic costs associated with drug enforcement. However, such arguments are incomplete because they miss an important benefit—decriminalization’s effect on policing.

Recent decriminalization legislation in New York, Oregon, and Colorado affects police authority to expand stops, conduct searches, and make arrests for drug possession. Such legislation also affects departmental incentives to conduct pretextual stops and militarize police personnel and divisions. With the diminished capacity and incentive to pursue drug possession arrests, police can redirect resources toward crimes with victims, crime prevention, and public safety.

More time and data are needed to assess decriminalization’s impact on policing thoroughly. Nonetheless, cannabis legalization in many states, as well as comprehensive decriminalization in Oregon, provides a natural case study for further examination of this approach.

Full Policy Brief: Drug Decriminalization as Police Reform

The post How drug decriminalization affects policing appeared first on Reason Foundation.

Question 4 on the Maryland ballot is a legislatively referred constitutional amendment that would legalize the use of marijuana for adults 21 years of age and older. It would add a new article—Article XX—to the Maryland Constitution stating this policy would take effect on July 1, 2023, and charge the General Assembly to pass laws governing the “use, distribution, possession, regulation, and taxation of cannabis.” 

Fiscal Impact

Question 4 is not directly associated with any fiscal impact on state or local governments. It would simply establish a new constitutional right for adults to use marijuana.  However, Maryland House Bill 837, which would become effective upon passage of Question 4, does have an estimated fiscal impact. The major effects include general fund allocations for the initial capitalization of two new special funds plus administrative costs to implement the automatic expungement of prior convictions. These total $46.5 million in the state’s 2023 fiscal year.

Separately, House Bill 837 would allow companies engaged in the cultivation, manufacture, or distribution of marijuana to claim business deductions for ordinary and necessary expenses that they are not currently eligible to claim. Legislative staff estimates this would reduce Maryland’s general fund revenues by $5.6 million in the 2023 fiscal year, although no licensees currently exist, nor does House Bill 837 even set forth a licensing process. Other data collection and studies required by the bill are estimated to cost $5.75 million in 2023.

At the same time, legalized marijuana sales seem likely to generate tax revenues of various sorts that could more than cover those costs. 

Proponents’ Arguments For

The Yes on 4 campaign argues: “Legalizing cannabis would stimulate Maryland’s economy and create tens of thousands of good-paying jobs, while allowing Maryland residents to benefit from vital investments in education, public health, and public safety funded by cannabis taxes.” 

In committee hearings, Marland Delegate Luke Clippinger (D) said his top priority in introducing House Bills 1 and 837 was to “address the overwhelming disparities that have impacted people of color, especially Black and brown people throughout Maryland.”

The bills would require an analysis of barriers faced by Black and brown people to establish a licensed marijuana business in order to provide for an equitable marketplace that would allow the participation of Black and brown entrepreneurs. House Bill 837 would also provide public support for the capital and operating expenses of minority-owned and women-owned marijuana businesses.

The legislation was also designed to address public health concerns by requiring the collection of data and completion of studies relating to “the patterns of use, incidents of impaired driving, prenatal health [and] hospitalizations.”

Opponents’ Arguments Against

There is no organized campaign against Question 4. In committee hearings, Delegate Brenda Thiam (R) expressed concern about the motivation behind the introduction of House Bills 1 and 837. She noted the sponsor’s argument that Black citizens are disproportionately impacted by the prohibition of marijuana through arrest rates and argued that Black Marylanders were “being used as a scapegoat to drive these very controversial conversations around cannabis.” She elaborated, “We’re being baited…that we’re going to expunge your record…You can become multi-millionaires…It’s just smoke and mirrors to entice us to buy into this.”

Delegate Susan McComas (R) argued in hearings that there appeared to be a rush to legalize marijuana prior to having knowledge of potential unintended consequences. She questioned whether the state should complete studies of the potential impacts on public health prior to making a substantial policy change.

Luke Niforatos of Smart Approaches to Marijuana (SAM), an anti-legalization advocacy group argued that the legalization of marijuana in California and Colorado has failed to drive away black-market actors and related crime.

Discussion

Medical marijuana is currently legal in Maryland and the possession of 10 grams, or less, of marijuana has been decriminalized. Question 4 would enshrine a very simple new constitutional right for Marylanders above the age of 21 to use marijuana if they choose. The way in which Marylanders could exercise this right is far less clear.  

As a legislatively referred constitutional amendment, Question 4 began as House Bill 1 in the 2022 legislative session sponsored by State Delegate Clippinger. To proceed to the ballot, the bill was required to receive at least 60% support within each chamber of the legislature. The final version passed the Maryland State Senate by a vote of 30-15 (66.7%) and the House by a vote of 89-41 (68.5%).

The amendment itself would only guarantee a constitutional right to the use of marijuana for adults subject to future regulation by the General Assembly. However, the General Assembly also passed companion legislation during its 2022 session that would become effective upon passage of the amendment. House Bill 837, also sponsored by Delegate Clippinger, provides some additional clarity as to how the constitutional amendment would be implemented and so these provisions should be read in tandem. 

House Bill 837 clarifies that, upon passage of Question 4, the possession of up to 1.5 ounces of marijuana or 10 grams of marijuana concentrate would immediately be decriminalized and subject only to small administrative fines. After June 30, 2023, possession of these amounts would become completely legal.

Citizens would also gain the right to cultivate up to two marijuana plants per household in a secure location at their residence. All prior convictions of marijuana possession that would be legal under these new provisions would be automatically expunged and the currently incarcerated would be able to apply for resentencing of possession convictions to time served. House Bill 837 also sets up a number of new state funds and requires certain studies, but it does not establish any commercial licensing system or regulatory framework to implement a marijuana market, nor does it impose any excise taxes on cannabis sales.

Although House Bill 837 provides some clarity, it fails to authorize any commercial system so that Marylanders could legally acquire marijuana products. This may subject Marylanders who attempt to satisfy market demand to raids or arrests and lead to inconsistent application of the law. The District of Columbia has also legalized the possession of marijuana without providing for a commercial system, and providers have been periodically raided by local police for illegally distributing marijuana that citizens are legally permitted to possess. Without enabling legislation in place to establish a commercial market, Marylanders risk a similar situation if Question 4 passes. This inconsistency has persisted for extended time periods in other states. After Nevada amended its constitution to protect citizens’ right to medical marijuana in 2000, it took 13 years before the legislature authorized a commercial system to satisfy this demand despite requirements for it to do so.

House Bill 837 does make positive strides by allowing for a limited amount of home cultivation, although other states permit as many as 12 plants to be cultivated at a residence. It also would enact intertemporal equity in the application of marijuana laws by automatically expunging convictions for actions that would become legal if Question 4 passes.

Despite failing to establish a commercial system or stipulating any excise tax rates for marijuana, House Bill 837 does begin to allocate money for certain programs. It would reserve 30% of all marijuana-related tax and fee revenue to a system of community improvement grants intended to offer job training and other services to communities disproportionately impacted by the drug war. It would also enshrine a Cannabis Public Health Advisory Council to produce data and provide initial recommendations on the advertising, labeling, and testing requirements for marijuana products that could eventually inform formal commercial regulations. Finally, it would create a Cannabis Business Assistance Fund and seed it with an appropriation from the state’s general fund to provide grants to small, minority-owned, and women-owned marijuana businesses. Eligible businesses could use these grants to finance capital and operating expenses, training, or license application fees. A potential concern is that this direct taxpayer funding of marijuana businesses could potentially implicate the state in federal aiding and abetting charges given that marijuana is still currently banned under the federal Controlled Substances Act and marijuana businesses are technically illegal at the federal level and can be considered criminal enterprises subject to racketeering laws. Further, if grant funding is indeed conditioned on gender or racial status, it may run afoul of the Equal Protection Clause under the 14th Amendment to the U.S. Constitution. Lawmakers should work to address these issues expeditiously should Question 4 pass in Novemeber 2022.

On the whole and, most importantly, however, Question 4 would effectively end the drug war in Maryland. Real-world data has shown that legalization has had no measurably strong effect on crime, road safety, or economic outcomes in the states that have legalized it. Marijuana use by high-school-aged young people has remained flat or fallen in states that have implemented legal, regulated adult-use marijuana markets.

While black market competitors remain prevalent in some states that have legal markets, this result is heavily tied to the impact that overly high taxes and regulations can have on making legal marijuana products more costly than similar cannabis products offered by illegal sellers. Survey data reveals consumers strongly prefer buying legal, tested marijuana products if the prices are close to those of black-market alternatives.

The post Maryland Question 4 (2022): Marijuana legalization amendment appeared first on Reason Foundation.

The dormant commerce clause is a doctrine of constitutional law derived from a series of court cases interpreting the interstate commerce clause of the U.S. Constitution. The Constitution’s framers were expressly motivated to replace the original form of American government, as articulated under the Articles of Confederation, to prevent the states from erecting trade barriers. Through the years, courts’ interpretations of the dormant commerce clause have generally held that states cannot enact policies that impede the free movement of goods, persons, or capital within the union.

A decade ago, many state policymakers may have thought preventing trade in cannabis goods was a necessity. In 2013, U.S. Deputy Attorney General James Cole issued the so-called Cole Memorandum to federal prosecutors, urging them to concentrate federal enforcement efforts against marijuana toward achieving a set of enumerated priorities. As Leafly put it:

The memo indicated that prosecutors and law enforcement should focus only on the following priorities related to state-legal cannabis operations:

• Preventing the distribution of marijuana to minors;
• Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
• Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
• Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
• Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
• Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
• Preventing marijuana possession or use on federal property.

It was modeled after a similar memorandum issued by Deputy Attorney General David Ogden in 2009 that directing US attorneys to “not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing laws providing for the medical use of marijuana.”

The Cole Memo represented a significant shift in the federal government to de-prioritize the use of funds to enforce cannabis prohibition under the Controlled Substances Act towards a more laissez-faire, hands-off approach.

After the memo was issued, most federal prosecutions were halted unless they met the listed criteria.

For this column’s purposes, the focus is on the memo’s goal of “preventing the diversion of marijuana from states where it is legal under state law in some form to other states.”

This guidance was never binding on federal prosecutors. Still, it likely reinforced a belief among some state policymakers that federal authority to enforce the Controlled Substances Act did not extend to purely intrastate commerce. Since the interstate commerce clause grants Congress the authority to regulate commerce between the states, one traditional interpretation has been that Congress held no authority to regulate commerce that did not cross state lines, which is why states could implement commercial cannabis markets.  

However, a U.S. Supreme Court decision in 2005 had already made clear that Congress held the authority to regulate even non-interstate, non-commerce in cannabis by ruling that it could seize assets from a seriously ill cancer patient who consumed cannabis she grew in her own home. This decision was the logical extension of a dubious Supreme Court decision from 1942 in which the court ruled that federal agencies held the authority to fine an Ohio farmer for avoiding New Deal-era price controls because he fed his animals with wheat grown on his farm. In that case, the court ruled the farmer’s actions affected interstate commerce because it prevented him from purchasing wheat elsewhere and thereby affected the supply and demand for wheat offered in interstate commerce.

Regardless of the dubious rationale for these decisions, those cases implied that state-regulated cannabis markets were in no way exempt from the requirements of the dormant commerce clause. To avoid implicating a Cole Memo priority, every state has banned exporting cannabis to, or importing cannabis from, other states.

Some states that have legalized cannabis have gone as far as stipulating that nonresidents could not operate or invest in a legal cannabis business within their borders—impeding the free movement of persons and capital.

The U.S. Supreme Court ruled in 2019 that a state-imposed residency requirement to gain a retail liquor license violated the dormant commerce clause and was unconstitutional. Although this was a direct parallel to state residency requirements for cannabis licenses, defendants before the First Circuit Court argued that the dormant commerce clause could not be extended to contraband items.

In its August ruling, however, the First Circuit’s majority pointed to the Rohrabacher-Farr rider attached to every federal spending bill since 2014. That rider prevents the Justice Department from spending resources to prosecute state-licensed cannabis companies in good standing. The majority observed:

…whatever the circumstances may be with respect to other goods that Congress has deemed contraband, this is not a case in which Congress may be understood to have criminalized a national market with no expectation that an interstate market would continue to operate. Quite the opposite.

In other words, Congress has already recognized the legitimacy of a market in cannabis, and therefore cannabis cannot be excluded from the requirements of the dormant commerce clause.

If it is clear that state restrictions on the free movement of persons and capital, even in the cannabis industry, are unconstitutional, it is also reasonable to expect the same regarding the movement of goods. It is, therefore, incumbent on state policymakers to begin working immediately to facilitate interstate trade in cannabis goods amongst the states where those products are legal.

The post First Circuit makes clear cannabis is subject to interstate commerce clause appeared first on Reason Foundation.

Summary

South Dakota’s Measure 27 is a statutory initiative that would legalize the use of marijuana for adults aged 21 and older.  South Dakotans would gain the right to possess up to one ounce of marijuana or eight grams of marijuana concentrates and gift up to those amounts to another adult without compensation.  Residents of counties or cities that do not have a licensed marijuana retailer would additionally gain the right to cultivate up to three plants per person or a maximum of six plants per household.

The ballot initiative would also protect an employer’s right to institute drug-free workplace policies and would not require employers to accommodate an employee’s marijuana use.  It would allow owners of private property to prohibit marijuana cultivation or consumption on their property.  It would also impose small administrative fines for individuals who cultivate marijuana without keeping it locked or invisible to the public and allow fines on adults who smoke marijuana in public places.

Fiscal Impact

Measure 27 imposes no taxes and requires no spending by state or local governments because it does not authorize a commercial system in need of licensing or administration.  Therefore, the ballot initiative has no direct fiscal impact on taxpayers.

Proponents’ Arguments For

Measure 27 is sponsored by South Dakotans for Better Marijuana Laws.  In 2020, this organization also sponsored Amendment A, a proposed state constitutional amendment to legalize marijuana and authorize a commercial marketplace.  Amendment A passed with 54% of the vote but was subsequently challenged by Pennington County Sheriff Kevin Thom and Highway Patrol Superintendent Rick Miller with the support of South Dakota Gov. Kristi Noem.  Their lawsuit alleged that Amendment A was deficient because it violated the single-subject limitation for ballot initiatives and amounted to a revision of the state constitution rather than an amendment. In Feb. 2021, a circuit court agreed with the plaintiffs on both claims and struck down Amendment A before it could be implemented.

Proponents responded by crafting Measure 27 as a much simpler initiative.  Measure 27 is statutory rather than constitutional, so it cannot be challenged on the revision grounds used to challenge Amendment A.  It also foregoes related provisions that had been included in Amendment A in order to avoid violating the single-subject restriction.  Whereas Amendment A provided some regulatory guidance for a commercial market, an excise tax rate, local government regulations, and provided for hemp and medical marijuana markets, Measure 27 is silent on all these subjects.  Presumably, the South Dakota legislature would need to enact a follow-on statute in order to create any of these provisions in the event voters approve Measure 27.

Opponents’ Arguments Against

The only organized opposition to Measure 27 is a committee called Protecting South Dakota Kids that claims “Legal marijuana will destroy our communities.” This organization also worries that legal marijuana could be profitable on a commercial basis and might attract investment from large, established firms in existing vice industries from other parts of the country, including “New York City hedge fund managers.”  They also assert that marijuana products today are more potent than those that were distributed at Woodstock in 1969.  Finally, opponents of Measure 27 claim that more minority children have been arrested in Colorado since that state legalized marijuana and that car crashes and youth marijuana use have increased in states with legal cannabis markets.

Additional Discussion

South Dakota’s Measure 27 was designed to accomplish the most basic facet of Amendment A without implicating any of the bases on which Amendment A was overturned.  If approved, Measure 27 would give South Dakotans the right to possess up to one ounce of marijuana.

While this approach may be a legal necessity in order to secure victory on a ballot question, the measure’s wording may also leave South Dakotans who want to legalize marijuana in a sort of legal limbo since they will have no place to legally buy the products they gain the ability to possess.  While it’s possible the South Dakota legislature could establish a commercial system and regulatory apparatus for legalized marijuana following approval of Measure 27, this is not guaranteed. 

The District of Columbia has also legalized the possession of marijuana without providing for a commercial system, and providers have been periodically raided by local police for illegally distributing marijuana that citizens are legally permitted to possess.  Police say they are responding to neighborhood complaints, not targeting legal cannabis businesses, but similar inconsistencies have persisted for extended time periods in other states.  After Nevada amended its constitution to protect citizens’ right to medical marijuana in 2000, for example, it took 13 years before the state legislature authorized a commercial marijuana system to satisfy this demand, despite express requirements for the legislature to do so.

The ability to cultivate some marijuana plants at home and share harvested marijuana with other adults would satisfy at least some of the demand for marijuana, although home cultivation has been largely insufficient to meet demand in other states, as evidenced by large volumes of commercial sales.

As for concerns about crime and safety, real-world data has shown that marijuana legalization has had no measurably strong effect on crime, road safety, or economic outcomes in the states that have legalized it.  Marijuana use by high-school-aged youth has remained flat or fallen in states that have implemented regulated cannabis markets.

Given what appeared to be coordinated opposition to Amendment A among elected officials following the 2020 election, Measure 27 might be South Dakota’s best chance in the near-term to legalize marijuana for adult use.

The post South Dakota Measure 27: Adult-use marijuana legalization appeared first on Reason Foundation.

As states have implemented adult-use cannabis markets, they have intentionally placed restrictions against any form of interstate trade within their regulatory frameworks. These restrictions generally support the aims of crony enterprises seeking to carve out regional monopolies but are patently unconstitutional. Some states have even gone so far as to impose residency requirements on all aspiring cannabis entrepreneurs, and even their passive investors, as a condition of licensure.

Courts have repeatedly made clear, however, that these state-imposed barriers to interstate commerce violate a body of law known as the Dormant Commerce Clause. The Dormant Commerce Clause was formed through a series of judicial interpretations of the U.S. Constitution’s Interstate Commerce Clause that generally prohibits states from imposing barriers to the free movement of goods, persons, and capital between the several states unless states have been granted express (and limited) authority to do so by Congress or if there is a legitimate public health concern that cannot be addressed through less restrictive means.

The economics of the Dormant Commerce Clause are tremendously beneficial for the nation as a whole because it promises a large national market for producers and encourages greater specialization reflective of the comparative advantages of persons or geographic areas. Indeed, it was the states’ imposition of trade barriers and their resulting inefficiencies that inspired the American founders to abandon the original form of American government guided by the Articles of Confederation. The Commerce Clause thus became a central focus of the nation’s new (and current) governing document.

The U.S. Supreme Court has recognized the primacy of the Commerce Clause throughout a long series of rulings. As recently as 2019, the court ruled in Tennessee Wine and Spirits that Tennessee could not require a person to have been a resident of Tennessee for at least two years as a condition of acquiring a license to open a liquor retailer. Several early states to enact adult-use cannabis markets, including Colorado, Maine, Oregon, and Washington, imposed nearly identical residency requirements to obtain a commercial cannabis license although several of the offending states have rescinded these requirements in the wake of the Tennessee Wine and Spirits ruling.

All states with regulated cannabis markets, however, prohibit the transfer of any cannabis inventory across state lines. State policymakers adopted these prohibitions largely in the belief that purely intrastate cannabis commerce would give the federal government no jurisdiction to prosecute licensed cannabis businesses or their regulators because the Commerce Clause only permits federal regulation of interstate transactions. This belief may be misguided.

In 2005, the U.S. Supreme Court relied on the Filburn interpretation of the Commerce Clause to assert, in Gonzales v. Raich, that federal prosecutorial authority extends to purely intrastate commerce. The Supreme Court had ruled in 1942 that federal agencies could fine Roscoe Filburn for evading New Deal-era price controls because he grew wheat and fed it to animals on his own farm. Even though Filburn’s actions neither constituted a commercial transaction nor crossed state lines, the court held that he had affected the supply and demand of wheat in the aggregate and therefore Congress could regulate his activity under the Commerce Clause. Although the Filburn decision has been widely derided, the court’s ruling in Gonzales makes it clear that federal authority extends to every cannabis transaction regulated at the state level.

A later policy adopted by the U.S. Justice Department in 2013 may have further cemented the belief among state policymakers that intrastate cannabis commerce could be shielded from federal prosecution. The Cole Memorandum, issued by Deputy Attorney General James Cole, advised federal prosecutors to focus their enforcement against federal cannabis crimes to those that implicate certain specified priorities. Among these priorities was “preventing the diversion of marijuana from states where it is legal under state law in some form to other states.”

It’s not clear whether this line implies that states with legal marijuana cannot permit shipments to any other state or whether it simply means shipments cannot occur to states where marijuana is not “legal under some form.”

In any case, the Cole Memo was never binding on federal prosecutors and was rescinded by the Sessions Memo in 2018 which directed prosecutors to apply the same standards toward cannabis as they have since 1980–at the height of the drug war.

This means there is no special opprobrium for purely intrastate cannabis commerce. As such, state-imposed bans against interstate commerce in cannabis are likely already unconstitutional, as Vanderbilt law professor Robert Mikos has opined. While the federal Controlled Substances Act authorizes criminal sanctions against all forms of cannabis commerce, states are not permitted to violate federal laws or constitutional principles simply because they are facilitating the violation of another.

In Tennessee Wine and Spirits, the plaintiff was a trade association of existing liquor retailers who sought to use the state’s licensing regime to bar a prospective new competitor from the marketplace. Similarly, some of the most prominent opponents to interstate commerce in cannabis are large corporate interests who have invested heavily to procure state-issued licenses and construct facilities. In states without advantageous climates for agriculture, these companies have built elaborate and costly indoor cultivation facilities designed to artificially mimic pristine outdoor growing conditions.

Robust interstate trade in cannabis would render many of these investments worthless overnight as lower-cost producers from California and Oregon displace high-cost goods in Illinois or New York. To maximize the value of these assets, entrenched licensees will seek to exclude as many competitors from the market as possible and lobby for regulations to accomplish that effect. These regulations make the cannabis industry less efficient and result in higher costs and fewer selections available to medical patients and adult-use consumers.

Some opponents to immediate interstate commerce claim that an open marketplace would threaten the viability of businesses granted licenses under social equity programs. These licensees were typically either direct victims of the drug war or come from communities disproportionately affected by the drug war and presumably have fewer resources with which to launch a business. States that limit the number of available licenses often reserve a select number of these licenses for social equity applicants. However, this opposition is unfounded. As Amber Littlejohn of the Minority Cannabis Business Association has argued, “The best thing you can do for social equity is open up the market.”

The well-heeled tend to dominate closed markets for the reasons described above.

Indeed, a thoughtful approach to federal legalization could create far more opportunities for social equity businesses through interstate commerce. The States Reform Act, for example, would expunge most federal convictions for cannabis and allow even the formerly incarcerated to apply for a federal cannabis license. It would further require the Small Business Administration to extend loans to cannabis businesses on the same basis as for other small businesses. The SBA offers business assistance programs specifically to “socially and economically disadvantaged individuals”—likely giving far greater protection to equity licensees than any state can offer within a closed market.

Congress should authorize a regulated system to facilitate interstate commerce such as that included within the States Reform Act. Even failing that eventuality, however, existing state regulatory agencies should begin working now to facilitate interstate commerce amongst the legal states.

The post Interstate trade in cannabis should begin immediately appeared first on Reason Foundation.

As MJ Biz Daily reported:

Gov. Gavin Newsom signed California’s 2022-23 state budget into law and, in doing so, enabled a significant shift in cannabis taxes that had long been sought by the industry.

The finalized budget eliminates the state marijuana cultivation tax and caps the 15% excise tax where it’s at for a minimum of three years.

Taxes have been one of the top complaints of licensed marijuana businesses in California, but until this year, attempts to roll back state tax rates had been met with defeat…

“More work needs to be done, but I see this as a big win,” Amy Jenkins, lobbyist for the California Cannabis Industry Association, told the Business Journal.

“To critics, I say this is a significant first step.”

The cannabis cultivation tax was a tax assessed on the dry weight of cannabis flowers at a rate of $161.28 per pound. While it was nominally assessed against licensed cannabis cultivators, the collection and remittance obligations were placed on the first licensed distributor to acquire the wholesale products from a cultivator. This made the accounting convoluted and, practically, cannabis cultivation tax liabilities were difficult to audit.

Moreover, as a wholesale tax, this levy raised the price of legal cannabis relative to illegal cannabis, but in a nontransparent manner because the cultivation tax was baked into the wholesale cost of goods without appearing as a taxable line item at retail to the ultimate consumer.

A Reason Foundation policy brief published in May examined the effect of California’s various taxes on legal cannabis commerce and how they affect individuals’ decisions to participate in the legal or illegal market. The research examined taxes assessed at the local and state levels, concluding that the effective taxes levied per pound of cannabis flower ranged from $677 per pound to $1,441 per pound in California, depending on the local jurisdiction.  

The cumulative effect of these taxes creates a price disparity between otherwise comparable cannabis products available on the legal and illicit markets. Recent surveys indicate consumers prefer legal cannabis products—if they are available at comparable prices to competing products on the illicit market, but will prefer illegal products as those prices diverge.

Reason Foundation obtained price and sale data for legal cannabis transactions in California and determined that consumers will purchase about 0.77% fewer legal products for every 1% rise in their price, with many of those consumers likely substituting illicit goods in their purchase decisions.

Analysis of per-capita spending levels on legal cannabis products in California, Colorado, and Oregon found that residents in these peer states spend more than three times per capita on legal cannabis products than Californians and this disparity could not fully be explained by differences in usage rates. It was reasonable to conclude, based on these observations, that high cumulative tax rates on legal cannabis products in California have inspired consumers to purchase substitute black-market goods, which account for roughly two-thirds of all cannabis spending in the state.

Reason Foundation recommended, at minimum, a repeal of the cultivation tax and perhaps a reduction in the retail excise tax. Our models revealed how the market would grow under various tax regimes as more consumers were induced to patronize legal retailers due to a falling price disparity between legal and illicit goods. A repeal of the cultivation tax, for example, could be expected to more than double the existing monthly cannabis tax revenues within two years as more transactions become subject to retail excise and general sales taxes.

Assembly Bill 195 not only accomplishes this repeal of the cultivation tax but also shifts the remittance burden of retail excise taxes from distributors to the retailers who sell the products and can accurately account for the final sales price. This important change has also been recommended by Reason Foundation because the prior system was difficult both to comply with and administer.

Finally, the bill would provide state support to local governments that have struggled to issue licenses to cannabis retailers. As Reason Foundation’s research notes, California boasts only one legal retailer per 29,282 residents while Colorado and Oregon boast one per 13,838 and 6,145 residents, respectively.  More than half of California’s legal retailers are located in just 18 municipalities.

Since California’s fiscal year began on July 1 and these changes had been incorporated into Gov. Newsom’s budget, it was vital that he sign this bill on the date he did.

However, important follow-up legislation remains alive in California. For example, Senate Bill 1281, which would lower the retail excise tax from 15% to 5%, would bring relief to California’s struggling legal cannabis market and has already passed the Senate by a vote of 29-1.

California has just made tremendous progress in trying to turn around its regulated cannabis market and more could soon be on the way.

The post California repeals cannabis cultivation tax appeared first on Reason Foundation.

“I think it’s something that’s going to really require further study,” Moore claimed, according to Marijuana Moment.

The bill would create a highly limited medical marijuana program in which only patients with certain debilitating medical conditions would be allowed to participate. These include cancer, epilepsy, HIV or AIDS, ALS—amyotrophic lateral sclerosis, Crohn’s disease, sickle cell anemia, Parkinson’s disease, multiple sclerosis, cachexia, severe and persistent nausea, post-traumatic stress disorder, or a terminal illness in which the patient has less than six months to live. Notably absent from this list are broader conditions that make a patient eligible to participate in most state medical marijuana programs, such as severe pain and mental health conditions, including anxiety and depression.

The production side of the medical marijuana bill would be even more restrictive, limiting the total number of available licenses to operate a medical marijuana business to a mere 10 businesses.  Regulators would narrow down the field to 20 applicants and submit them to a commission of political appointees, who would select 10 of the 20 recommended applicants.

This selection method would be highly susceptible to political manipulation or corruption, as appointees could select politically connected applicants to receive licenses. A similar commission in Michigan was scrapped in 2019 after stories of corruption emerged. All the commission’s duties were consequently folded into Michigan’s Marijuana Regulatory Agency, which immediately improved approval timelines as regulators were instructed to strictly apply rules rather than make arbitrary political decisions.

Each of the 10 applicants ultimately awarded licenses in North Carolina would then be able to cultivate and manufacture medical marijuana products and sell those products through medical marijuana dispensaries they also own.  In other words, vertical integration of the supply chain would be mandatory and no wholesale transfers of medical marijuana products would be permitted between licensees. Each licensee would be allowed to open no more than eight dispensaries, meaning a maximum of 80 dispensaries statewide, which is fewer than the number of counties in North Carolina.

Vertical integration requirements in marijuana laws have proven to be challenging in other states for a number of reasons.  For entrepreneurs who are not well endowed with capital, the capital requirements necessary to outfit large cultivation and manufacturing operations along with multiple retail locations can be staggering.  Legal cannabis businesses generally cannot acquire bank loans or other debt capital due to their products still being illegal at the federal level, so these legal businesses are largely funded through private equity. 

Similarly, some entrepreneurs may have the skillset to operate a marijuana cultivation facility, but not have as much expertise in manufacturing or retail.  Each of these stages of the supply chain is a distinct business operation that demands different forms of expertise and shouldn’t be forced together in marijuana laws.

These are not the only shortcomings of the North Carolina medical marijuana proposal. State lawmakers also proposed barring any applicant from the legal marijuana industry if the majority owner of the business had not been a North Carolina resident for at least two years prior. Residency requirements like this are patently unconstitutional. The U.S. Supreme Court has clearly ruled that they impose unnecessary barriers to interstate trade in violation of a body of law known as the Dormant Commerce Clause.

Beyond that, the medical marijuana bill would impose a 10 percent tax on the gross receipts of all licensees. Several states impose no special excise tax on medical marijuana, even if they do so for adult-use marijuana, in recognition of the fact that patients are purchasing these goods to fill a medical need under the supervision of a doctor. Medical marijuana sales would also have been subject to the general sales and use tax.  These taxes would compound the federal tax penalty for marijuana businesses, creating a price disparity between legal and regulated medical marijuana and illicit marijuana that can undermine the orderly, legal market.

In spite of the bill’s shortcomings, it is somewhat encouraging that North Carolina had the bipartisan votes to move a medical marijuana proposal out of at least one legislative chamber. This comes months after South Carolina lawmakers also passed a medical marijuana bill out of their upper chamber. Together, these incremental signs hopefully represent a changing of attitudes toward medical marijuana in the Carolinas, which are among the last remaining bastions of medical marijuana prohibition in America.

Perhaps with another year and more improvement of the legislative language, the Carolinas can launch functional medical marijuana markets that help patients get the relief they need and increase freedom in those states.

The post North Carolina House won’t take up bipartisan medical marijuana bill passed by State Senate appeared first on Reason Foundation.

California launched its legal cannabis market in Jan. 2018, but the illegal market continues to dominate the legal one. Cannabis is subject to an array of taxes assessed at the state and local levels and these taxes create a price disparity between legal and illegal marijuana products that are otherwise similar in nature. Moreover, illegal and unregulated supply chains are firmly established across California whereas legal supply chains for cannabis are newly emerging and largely fragmented across the state, with two-thirds of municipalities banning legal sales in their jurisdictions even though the state’s voters legalized cannabis.

The Reason Foundation analysis shows a majority of licensed retailers are concentrated in just 18 local jurisdictions while there are no legal cannabis retailers within any reasonable distance of residents’ homes across vast swaths of the state. The report quantifies the effects of taxation on the legal cannabis market, showing that the total tax per pound of cannabis in California ranges from $677 to $1,441, depending on the local jurisdiction. These tax costs are greater than the wholesale production cost of cannabis which is estimated at $564 per pound. The costs of these taxes are passed on to California consumers, with the prevailing price of legal cannabis at retail averaging $6.84 per gram, or $3,103 per pound.  

The cumulative total tax cost in California, which includes local levies, a state wholesale cultivation tax, a state retail excise tax, and ordinary sales tax is far greater than in comparable states with mature marijuana markets, such as Oregon and Colorado. Both Oregon and Colorado exempt cannabis sales from ordinary sales taxes and assess simplified excise taxes. 

Data shows that legal cannabis sales in these states, on a per capita basis, are far greater than in California and that this difference cannot be fully explained by a difference in usage rates. The Reason Foundation analysis concludes that illegal sales still comprise a large share of California’s cannabis market based on these data and that a reduction in taxes could spur faster growth of the legal market at the expense of the illegal market.

Now, new evidence supporting these observations has emerged in a study published in the Journal of Studies on Alcohol and Drugs. The study draws on direct survey data of consumers in the United States and Canada through the International Cannabis Policy Study. The survey contacted nearly 50,000 respondents in 2019 and 2020 to poll their usage and buying patterns of cannabis products. Approximately 17,000 respondents lived in a location with mature, legal cannabis markets and reported purchasing legal cannabis within the prior year. Among these, nearly 12,000 people gave some indication they had purchased cannabis from an illegal source while the remainder indicated they had only purchased from legal sources.

Among consumers who indicated they had purchased illegal cannabis, the top reason given for preferring illegal products was the price. More than one-third of respondents indicated a belief that legal retailers charged higher prices. The study’s authors compared respondents’ beliefs on price to the average reported prices of legal cannabis products within their regions and found this belief was more prevalent in regions that had higher retail prices. In other words, consumers’ belief about the price if cannabis was largely accurate. Since cannabis taxes raise retail prices, they likely play a substantial role in pushing consumers toward illegal sellers.

The second and third most prevalent reasons given for purchasing illegal marijuana—consumers believe legal sources are less convenient or are too far away from respondents’ place of residence—are also relevant to California’s legal products having difficulties competing with illicit markets

Additional reasons for purchasing illegal cannabis were far less prevalent but included factors such as loyalty to an established dealer, the desire to remain anonymous, and supply shortages at legal retailers.

The survey results illustrate that many consumers will continue to purchase illegal cannabis, even in markets with legal cannabis, when the retail price of legal cannabis is significantly higher than illegal alternatives or legal retailers are unavailable or inconveniently located. 

Consumers say they are far more likely to opt for legal cannabis if the prices are comparable to those of illegal alternatives. Thus, the survey shows states that are trying to make their legal marijuana markets more competitive with illicit products the path forward: reduce cannabis taxes so legal products can be more price competitive with illicit products.

The post Consumers say price and availability are barriers to choosing legal cannabis products over illicit products appeared first on Reason Foundation.

No other agricultural good faces a cultivation tax similar to the one imposed on marijuana.  Eliminating the cultivation tax would allow farmers and licensed cannabis retailers to lower prices, making the legal marijuana market more competitive with illicit markets. Since the state collects several other marijuana-related taxes, including general sales taxes on cannabis sales, California could eliminate the cultivation tax and still bring in 123% more in total monthly marijuana-related tax revenue by 2024 than it currently does, according to my new Reason Foundation study.

Eliminating the tax would lower prices and increase the sales of legal cannabis products, which would then increase the government’s general sales tax revenue and more than replace the losses from the eliminated cultivation tax.

Based on its population and adult-usage rates in other states with legal marijuana, California’s legal cannabis market is just one-third of the size that would be expected.  Even after legalization, nearly two-thirds of marijuana sales in the state are still taking place on the illicit market, where products aren’t taxed and, thus, are far cheaper.

California’s state and local taxes on legal cannabis can be as high as $90 per ounce, or $1,441 per pound, dramatically higher than other states. For example, taxes on legal marijuana average $340 per pound in Oregon and $526 a pound in Colorado. Those lower taxes make legal cannabis products more competitive with black market products in those states. As a result, Oregonians spend 378% more per capita on legal cannabis and Coloradoans spend 335% more per capita on cannabis than Californians spend per capita.

What once was expected to be a thriving legal cannabis market, now has small businesses wondering how they can survive in the state. “We are experiencing first-hand a serious price compression in the California supply-chain in part as a result of the illegal market, high taxes and fees, and a patchwork of inconsistent local taxes driving legal operators to the brink of a financial cliff,” says Amy O’Gorman Jenkins, legislative advocate of the California Cannabis Industry Association. “We cannot allow the largest cannabis market in the world to fail.”

Marijuana industry experts are sounding these alarms about total market failure because California’s taxes and regulations have more and more cannabis farmers and small businesses considering giving up on California’s licensed cannabis market.

“Cannabis farmers throughout the state are experiencing the biggest challenges of their time. Many farmers are considering going fallow this year. For example, Busy Bee Organics, one of the first woman-owned, sun-grown farmers in Santa Barbara County, has already declared she’s not planting this year,” says Sam Rodriguez, policy director of Good Farmers Great Neighbors, a collective of Santa Barbara County cannabis businesses.

Eliminating the cannabis cultivation tax would help growers, retailers, and consumers. Reducing the retail excise tax would further help the legal cannabis market. And state lawmakers should also look at revenue-sharing opportunities or other incentives that might encourage California’s local governments to stop banning the sale of legal cannabis products in their jurisdictions.

Most local governments still prohibit the sale of marijuana, so an understated problem is just how few legal cannabis storefronts there are in California. Oregon has one legal cannabis retailer for every 6,145 residents and Colorado has one legal retailer for every 13,838 residents while California has just one legal marijuana retailer for every 29,292 residents.

California’s voters overwhelmingly approved the legalization of cannabis. Eliminating the cultivation tax and allowing more cannabis businesses to open would start to get California closer to the legal, safe, licensed cannabis market that voters envisioned.

A version of this column previously appeared in the Orange County Register.

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In November 2016, California voters approved Proposition 64 to enact a regulated, adult-use cannabis market in the Golden State. At the time, four other states had already created adult-use cannabis markets, including Alaska, Colorado, Oregon, and Washington.

California already had a largely unregulated medical cannabis market in place, following voters’ historic passage of Proposition 215 in 1996, which was the first medical marijuana law in the nation to go into effect. Since Proposition 64 required specific regulations to govern inventory tracking, licensing, testing and more, these regulatory provisions would have to extend to the unregulated legacy medical market. If not, market participants could subvert the regulatory intent contained in Proposition 64 simply by remaining in the unregulated medical market

Realizing this need, California lawmakers passed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) in 2017.

MAUCRSA superseded prior legislation from 2015 called the Medical Cannabis Regulation and Safety Act, which sought to create a regulatory structure for the medical market but never took effect due to the passage of Proposition 64 and MAUCRSA, which largely built on the regulatory approach that had been developed within that prior legislation, but also extended it to the newly authorized adult-use market.

The statutory language contained in Proposition 64 and MAUCRSA combine to create the legal framework for California’s commercial cannabis industry. Regulations governing the industry must be consistent with these authorizing statutes. Proposition 64 contained important provisions that strongly affect California’s commercial cannabis market that cannot be changed through regulatory action alone. Chiefly, these include imposing two new excise taxes and devolving authority to local governments to regulate or outright ban certain or all types of commercial cannabis activity within their jurisdictions.

Taxes affect both consumers’ and producers’ decisions in the legal market primarily by introducing a price disparity between legal cannabis products and comparable cannabis products offered through the illicit market. Similarly, local bans on legal sales over extended geographic areas can drive consumers without access to legal products within a reasonable distance of their homes to purchase substitute goods on the illicit market.

This analysis develops an empirical model to estimate the degree to which California’s tax regime affects participation within its commercial cannabis market, and how participation may change through different approaches to taxation.

Part 2 of the study details the various tax structures currently facing legal cannabis enterprises in California and how those tax structures have performed in yielding public revenue.

Part 3 examines the key factors that influence consumer decisions to participate in the legal or illegal market.

Part 4 reviews the existing literature on consumer price sensitivity for cannabis products and calculates a price sensitivity for consumers of legal products in California and Oregon.

Part 5 uses data calculated in prior sections to model California consumers’ expected behavior due to changes in retail price in response to a change in tax policy.

Finally, Part 6 of the report concludes with recommendations for improving the performance of California’s legal cannabis market.

Full Policy Study: The Impact of California Cannabis Taxes on Participation Within the Legal Market

The post The impact of California’s cannabis taxes on participation within the legal market appeared first on Reason Foundation.

Back in the days before legal marijuana, I undertook to investigate how it might be legalized, taxed, and regulated. While I was partial to a free-market model (as opposed to a government monopoly,) it seemed apparent that marijuana should logically be taxed like other legal intoxicants such as alcohol and tobacco, both to cover the social costs of its abuse, and to offer non-using voters a solid reason to back legalization. There being no better data at the time, I took a clue from the 1893 British Indian Hemp Drugs Report, the most thorough published investigation of an actual, historical legal cannabis regime in British India. The report examined various Indian states’ regimes, ranging from laissez-faire to prohibition. It concluded by commending the state of Bengal as having the most successful and effective system. Bengal exacted licensing fees from producers and vendors and imposed a weight-based excise tax on the wholesale crop. With this in mind, I tried to devise the best comparable tax for marijuana in a modern legal market. Like other cannabis policy wonks at the time, I was worried that the retail price of marijuana might precipitously collapse if it were legalized along the same free-market lines as comparable agricultural crops such as parsley, herbs, or tea. In that case, it appeared retail prices could easily fall as low as a dime per joint. This seemed far too small a value to place on a widely treasured and enjoyable, but potentially habit-forming and impairing, crop. Based on back-of-the-envelope numbers, I figured that an excise tax of about $1.00 per joint or $50 per ounce would be sufficient to sustain a reasonable retail price for the herb.

When California finally legalized cannabis under Prop. 64, lo and behold, it turned out that I had vastly underestimated the cost of the regulations imposed by the new law. In addition to state and local licensing fees, there were elaborate rules on cultivation, retailing, transportation, manufacture, testing, facility siting, ownership, security, storage, on-site consumption, wholesale distribution, seed-to-sale tracking, waste disposal, labeling, packaging, environmental compliance, water usage, etc. ad nauseam. No way was the price of marijuana in danger of plummeting to pennies per joint; rather, it was becoming costly. Nonetheless, on top of that Prop. 64 imposed an ambitious package of cultivation and excise taxes aimed at raising some $1 billion per year for various state programs, and local governments were authorized to levy even more taxes on their own. The situation was further exacerbated by local dispensary bans and licensing delays, which left the state with half as many adult-use dispensaries as there were medical collectives before Prop. 64 was passed. As a result, California’s legal industry has been hard-pressed to compete with untaxed, unregulated providers on the underground market. So dire is the current situation that advocates now fear that the cannabis industry in California faces an “existential crisis” in the absence of meaningful tax reform.

The roots of this crisis are amply documented in Reason Foundation’s timely new report on cannabis taxes in California. The author has helpfully compiled comprehensive data on cannabis prices, taxes, revenues, licensees, and demand that weren’t available in the days before Prop 64. Finding that California lags behind other legal states in licensed cannabis sales, the report estimates that the illegal market accounts for roughly two-thirds of total sales in the state. Based on a survey of various local tax regimes from around the state, it finds that the effective tax rate ranges from $42 to $90 per ounce—more than the wholesale production cost of $35. Analyzing a variety of different tax scenarios, beginning with elimination of the cultivation tax and then progressive reductions in the excise tax, the report provides a helpful roadmap for cannabis tax reform in California. In the end, it projects that even with substantial tax reductions, the state can expect total revenues to rise substantially in the next two years due to increased consumer demand. Substantive tax cuts therefore seem to be a feasible strategy for reducing demand for the illicit market, while still retaining reasonable revenues for the state programs funded in Prop. 64. May this timely report from Reason Foundation prove enlightening to the state’s lawmakers.

Dale Gieringer, Ph.D.
Director, California NORML

Full Policy Study: The Impact of California Cannabis Taxes on Participation Within the Legal Market

The post California’s legal marijuana industry has been hard-pressed to compete with untaxed, unregulated providers appeared first on Reason Foundation.

This post is an excerpt from the recommendations section of the policy study: “The impact of California cannabis taxes on participation within the legal market.”

The analysis presented in Part 5 of this report makes clear that California’s adult-use cannabis market should be expected to grow more quickly in response to a reduction in tax rates.

Part 2 shows that California’s marijuana tax rates are high compared to other states with mature legal marijuana markets and that local assessments quickly compound with state assessments such that the per-pound equivalent of cannabis taxes in California can range as high as $1,441 per pound.

Parts 3 and 4 of the report demonstrate that retail prices in California are higher than in other states with established cannabis markets and that consumer spending per capita on legal cannabis products is significantly lower. Lower per-capita spending in California is not fully explained by differences in cannabis usage rates, implying through the data that Californians spend roughly twice as much on illegal cannabis products as on legal ones.

Tax costs are a significant component of retail marijuana prices in California and this analysis shows that a reduction in taxes can make legal products more price-competitive with illegal products and lure more consumers into the regulated market. This overall market growth will quickly displace the lost revenue resulting from a reduction in tax rates.

Moreover, policymakers may wish to consider a reduction in California’s cannabis taxes for reasons beyond economic or fiscal impacts. High taxes on legal products, combined with a paucity of legal retailers in many regions of the state, encourage consumers and producers to frequent the illegal market. Transactions on the illegal market are unregulated and may be a threat to public safety. Illegal products are untested and may be contaminated. Participants in illegal markets have no legal recourse to peaceably resolve disputes and sometimes resort to violence. International drug cartels may become prominent suppliers of illegal products in extraordinarily high-tax areas or those without legal retailers.

Tax costs are a significant component of retail prices and this analysis shows that a reduction in cannabis taxes can make legal marijuana products more price-competitive with illegal products and attract more consumers to the regulated market.

For all these reasons, California lawmakers should consider major changes to the state’s cannabis taxes.

1. Repeal or suspend the cultivation tax. As Reason Foundation has noted previously, wholesale cannabis taxes are hidden from the ultimate consumer, and difficult to administer and audit and pyramid up the supply chain. This analysis makes additionally clear that repealing the cultivation tax will result in faster growth of the legal market and will quickly result in more total tax revenue than the state receives currently. If the cultivation tax is eliminated and no other changes are made, the total monthly state revenue from taxes on cannabis transactions by December 2024 will be more than double their March 2022 level.
2. Reduce retail excise taxes. Part 3 compared California’s cannabis market performance to two states—Colorado and Oregon—that levy retail excise taxes but exempt cannabis sales from general sales taxes. California applies both taxes to retail transactions on cannabis, raising its effective tax rate substantially above competing markets. Policymakers needn’t fully eliminate the retail excise tax, but reducing its rate combined with eliminating the cultivation tax could lead to much faster growth of the legal market and displacement of the illegal market. Under Scenario 3, a reduction of the excise tax from 15% to 10% would still yield $119 million in monthly state tax revenue from cannabis sales by December 2024, which is nearly double its current level.
3. Explore methods to induce greater participation by local governments. Proposition 64 and the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) allow local governments to ban cannabis enterprises within their jurisdictions, with a shocking number of California’s local governments doing so. Part 3 shows more than half of the state’s legal retailers are concentrated in just 18 jurisdictions. Meanwhile, massive cannabis deserts exist across the state in which consumers have no access to a legal retailer within a reasonable distance of their homes. Without legal alternatives, these consumers are likely to patronize illegal retailers.

Removing the authorities granted to local governments under current law would be a fundamental change to the state’s cannabis market, but several states allow local governments only to reasonably regulate the times and manner of cannabis enterprise operations without imposing outright bans. However, lawmakers needn’t go that far, as alternative approaches might help induce more local governments to participate. For example, the state could direct a portion of its cannabis tax revenues toward a revenue-sharing pool in which local governments can participate proportionally along with the sales volume that occurs within their jurisdictions.

At the same time, however, state lawmakers should seek to limit the additional layers of taxation assessed by local governments because these taxes compound to make legal products uncompetitive on a price basis with illegal products. In other words, the state may be able to creatively displace local government tax revenues such that a reduction in state taxes is not offset by further increases in local tax rates.

Full Policy Study: The Impact of California Cannabis Taxes on Participation Within the Legal Market

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