By: John Edwin Hayman III
Witnessing the appearance and subsequent regulation of an emerging market is not a common occurrence. Although marijuana remains illegal at the federal level, eighteen states have legalized it for adult consumption or sale utilizing voter referendum, or action by the state legislature.[i] An additional eighteen states have created medicinal marijuana systems while still maintaining prohibition for recreational use.[ii] Ignoring the cries of critics, who argue that marijuana is linked to an increase in crime and mental health issues[iii], an overwhelming majority of Americans now support legalization efforts. [iv] Pew Research conducted a poll in April 2021, where the results showed that 60 percent of U.S. adults favor legalization outright, while 31 percent think marijuana should be legal, but for medical use only.[v] Less than 10 percent of those polled said marijuana should not be legal for adult consumption.[vi] Given this recent trend of legalization in addition to the emergence of cannabis as a major industry[vii], we can expect new markets to appear in the near future. The question then becomes how states should regulate their marijuana markets?[viii] New issues will invariably arise as to who may receive a license to sell or grow and how such revenues should be taxed.[ix]
As marijuana remains illegal under federal law[x], regulation of the cannabis market exists almost exclusively at the state level.[xi] Unsurprisingly, the lack of a federal framework for marijuana legalization has led to a diverse range of approaches.[xii]
Legalization advocates argue that creating a regulated and legal marijuana market will exert significant pressure on criminal actors currently engaged in the black market. [xiii] Criminal organizations, unwilling or unable to turn to the police or courts, inevitably resort to violence to adjudicate their disputes. [xiv] Thus, a primary goal of legalization is to reduce “the power and wealth of cartels and drug gangs.”[xv] However, simple logic dictates that accomplishing such a goal requires a competitive legal market.[xvi] If prices on the black market remain lower than the legal market, consumers will not look to immature legal market.[xvii] Rather, they will turn straight back to the street dealer they have always known.[xviii] Thus, states legislatures and regulatory bodies must take care when enacting rules and regulations regarding the cultivation, sale, and taxation of marijuana.[xix] Some states, such as Washington, have opted to tax marijuana at the high rate of 37 percent. [xx] While most states have opted for a price-based tax, others such as New York have installed a THC-based tax. [xxi] Still, others states differentiate between “flower,” “bud,” and “concentrates,” creating separate systems for different types of marijuana products.[xxii] Whatever the means, a key goal for policymakers is to “convert consumers from the unregulated market to the regulated market.”[xxiii] If correctly implemented, excise taxes from marijuana sales could lead to significant revenue gains to the state.[xxiv] However, as taxation is a complex issue, there are many externalities that will factor into setting any tax rate.[xxv] Taxing marijuana with an excise tax is simple, but revenues will be affected by price fluctuation.[xxvi] Taxing marijuana by potency level would rectify this and make it easier for state governments to forecast their revenues.[xxvii]
However, marijuana is no different from any other commodity, and its markets are still subject to the rules of basic economics[xxviii]. As most states allow municipalities to “opt-out” of legal marijuana sales, and those that “opt-in” usually require a license to operate[xxix], the supply of legal marijuana is necessarily limited to only what the local government will allow.[xxx] The result? Not only are prices higher, but the door to corruption has been opened. [xxxi] In California, multiple government officials have been arrested or investigated for taking bribes relating to the legal market. [xxxii] Essentially, state and local level licensing regimes functionally operate to create legal oligopolies by creating an artificially low level of supply and arbitrarily limiting the number of businesses participating in the market.[xxxiii]
Vertical integration, the system imposed by most state regulatory regimes, further favors alienation and disenfranchisement of potential mom-and-pop growers and, through its exhaustive regulatory requirements, requiring marijuana retailers to control every aspect of the product from cultivation to sale, imposing a significant cost burden.[xxxiv] Governor Ron DeSantis of Florida likened mandatory vertical integration, which requires marijuana vendors to oversee all aspects of cultivation and sale, to “a cartel.” [xxxv] Vertical integration, as Forbes puts it, presents significant problems for anyone “without endless streams of capital,” while presenting significant gains for those that do. [xxxvi]
Legalization advocates also argue it will help reduce the war on drug’s harm on minority populations.[xxxvii] A highly regulated, complex, and expensive licensing system will leave many victims of the government’s war on marijuana effectively ostracized from the market.[xxxviii] According to the America Civil Liberties Union ("ACLU”), African-Americans are 3.73 times more likely to be arrested on possession charges than white-Americans, despite using the drug at nearly the same rate.[xxxix] A 2017 survey found that African-Americans represent only 4.3 percent of marijuana business owners or stakeholders. [xl] As African Americans already face significant hurdles regarding access to capital,[xli] is it any wonder they are being left behind? For example, to own and operate a marijuana dispensary in newly legalized Illinois, applicants have to pay a non-refundable $5 thousand application fee in addition to a licensing fee of $40 thousand.[xlii] If that price seems difficult for citizens of any race, that is because it is. [xliii] It is easy to see why it appears difficult to establish significant minority representation within the marijuana industry.
In summary, the imposition of overly complex and arbitrary regulations on the cultivation and sale of marijuana prices ordinary people out of the market and undermines the goals of legalization. Prospective business owners are met with thousands of pages of confusing regulations. [xliv] Navigating such treacherous waters requires a considerable degree of legal expertise, imposing additional costs on an already costly venture.[xlv] Lawmakers and regulators must consider the practical consequences of their efforts to regulate a market they likely do not understand. [xlvi]
[i] Sean Williams, An Updated State-by-State Look at Where Marijuana is Legal, Motley Fool (June 27, 2021, 6:36 AM), https://www.fool.com/investing/2021/06/27/updated-state-by-state-look-where-marijuana-legal/ [https://perma.cc/M99H-ZLDW].
[ii] Id.
[iii] Alex Berenson, What Advocates of Legalizing Pot Don’t Want You to Know, New York Times (Jan. 4, 2019) https://www.nytimes.com/2019/01/04/opinion/marijuana-pot-health-risks-legalization.html [https://perma.cc/ATC7-RLAW]?
[iv] Ted Van Green, Americans overwhelmingly say marijuana should be legal for recreational or medical use, Pew Rsrch. Ctr. (Apr. 16, 2021), https://www.pewresearch.org/fact-tank/2021/04/16/americans-overwhelmingly-say-marijuana-should-be-legal-for-recreational-or-medical-use/ [https://perma.cc/U2XR-YU4W].
[v] Id.
[vi] Id.
[vii] Cannabis Market Size to Worth $97.35 Billion by 2026; Increased Use for Medical & Therapeutic Purposes to Aid Marijuana Industry Growth, Says Fortune Business Insights, Global News Wire (June 8, 2021, 9:30 AM), https://www.globenewswire.com/en/news-release/2021/06/08/2243761/0/en/Cannabis-Market-Size-to-Worth-97-35-Billion-by-2026-Increased-Use-for-Medical-Theraputic-Purposes-to-Aid-Marijuana-Industry-Growth-Says-Fortune-Business-Insights.html [https://perma.cc/L2K5-ZNN6].
[viii] See David Nathan, How to regulate pot when it’s legal, Cable News Network, https://www.cnn.com/2013/08/27/opinion/nathan-pot-regulation/index.html (last updated Aug. 27, 2013, 12:28 PM) [https://perma.cc/8264-MQTR].
[ix] Emily Crick, Heather J. Haase & Dave Bewley-Taylor, Legally Regulated Cannabis Markets in the US: Implications and Possibilities, Global Drug Pol’y Observatory (Nov. 2013), https://www.tni.org/files/gdpo1.pdf [https://perma.cc/ENQ6-AEDS].
[x] Stacy Barrett, Medical Marijuana and Federal Law, Crim.Def.Law., https://www.criminaldefenselawyer.com/resources/criminal-defense/federal-crime/medical-marijuana-federal-laws.htm (last viewed Oct. 16, 2021) [https://perma.cc/VNP8-ABTG].
[xi] Michael J. Gaunt, Lack of Federal Regulation of Medical Cannabis Raises Risks, Pharmacy Times (May 14, 2020), https://www.pharmacytimes.com/view/lack-of-federal-regulation-of-medical-cannabis-raises-risks [https://perma.cc/PFT2-3KQC].
[xii] Id.
[xiii] Cody Jorgensen, How Marijuana Legalization Would Benefit the Criminal Justice System, Boise St. U. (Jan 13, 2020), https://www.boisestate.edu/bluereview/how-marijuana-legalization-would-benefit-the-criminal-justice-system/ [https://perma.cc/B2C3-67FW].
[xiv] Id.
[xv] Id.
[xvi] Justin Laurence, Why Is Legal Weed So Expensive? Low Supply, Hight Demand and Big Tax Driving Chicago’s Pricey Pot, Block Club Chi. (Jan. 14, 2020, 9:10 AM), https://blockclubchicago.org/2020/01/14/why-is-legal-weed-so-expensive-low-supply-high-demand-and-big-tax-driving-chicagos-pricey-pot/ [https://perma.cc/5J4D-RJ77].; Ulrik Boesen, Excise Tax Application and Trends, Tax Found. (Mar. 2021), https://files.taxfoundation.org/20210315131902/Excise-Tax-Application-and-Trends.pdf [https://perma.cc/NYR2-WQA9].
[xvii] Boessen, supra note xvi.
[xviii] See id.
[xix] Ulrik Boesen, A Road Map to Recreational Marijuana Taxation, Tax Found. (June 9, 2020), https://taxfoundation.org/recreational-marijuana-tax/ [https://perma.cc/A662-FWFH].
[xx] Ulrik Boesen, How High Are Taxes on Recreational Marijuana in Your State?, Tax Found. (Mar. 31, 2021), https://taxfoundation.org/state-recreational-marijuana-taxes-2021/ [https://perma.cc/U8E3-AFJN].
[xxi] Id.
[xxii] Boesen, supra note xx.
[xxiii] Id.
[xxiv] Id.
[xxv] Id.
[xxvi] Id.
[xxvii] Id.
[xxviii] See Boesen, supra note xvi at 25.
[xxix] Lauren Yates, Lake Placid Super Speaks out Against Dispensaries, Adirondack Daily Enterprise (Oct. 1, 2021), https://www.adirondackdailyenterprise.com/news/local-news/2021/10/lake-placid-super-speaks-out-against-dispensaries/ [https://perma.cc/QZ3H-56N8].; Chris Edwards, Marijuana Licensing Corruption, Cato Inst. (Feb. 4, 2021, 3:46 PM), https://www.cato.org/blog/marijuana-licensing-corruption [https://perma.cc/6WY4-BQQ6].
[xxx] See id.
[xxxi] Adam Elmahrek & Ruben Vies, FBI Raids on Local Officials Mark Latest Probe Targeting Corruption in Cannabis Licensing, L.A. Times (Nov. 9, 2020, 5:00 AM), https://www.latimes.com/california/story/2020-11-09/cannabis-fbi-search-warrants-baldwin-park-compton-san-bernardino [https://perma.cc/3ZHJ-GE72].
[xxxii] Id.
[xxxiii] See Thomas J. DiLorenzo, The Myth of Natural Monopoly, Mises Inst. (Jan. 14, 2019), https://mises.org/library/myth-natural-monopoly [https://perma.cc/DMT5-AJK3];
Susan Gunelius, How Big Business, Monopolies, and Licenses Impact the Marijuana Industry, Cannabiz Media (Feb. 7, 2020), https://www.cannabiz.media/blog/how-big-business-monopolies-and-stacked-licenses-impact-the-marijuana-industry [https://perma.cc/H4AC-GXKG].
[xxxiv] Mike King, The Pros and Cons of Cannabis Vertical Integration, Vangst (Apr. 08, 2021), https://vangst.com/blog/vertical-integration-cannabis [https://perma.cc/D7GS-EZWW].
[xxxv] Dara Kam, ‘Free Market’ Marijuana Changes Could be Hard Sell, Health News Fla. (Feb. 1, 2019, 8:16 AM), https://health.wusf.usf.edu/hnf-stories/2019-02-01/free-market-marijuana-changes-could-be-hard-sell [https://perma.cc/SE69-5SQV].
[xxxvi] Lindsey Bartlett, How to Build a Vertically-Integrated Cannabis Empire, Forbes (Oct. 29,2020, 7:20 AM), https://www.forbes.com/sites/lindseybartlett/2020/10/29/how-to-build-a-vertically-integrated-cannabis-empire/?sh=579dd63a467d [https://perma.cc/6YJP-Z32H].
[xxxvii] John Hudak, Reversing the War on Drugs: A Five-Point Plan, Brookings (July 7, 2021), https://www.brookings.edu/research/reversing-the-war-on-drugs-a-five-point-plan/ [https://perma.cc/LD7L-9R76].
[xxxviii] Nick Charles, Black Entrepreneurs Struggle to Join Legal Weed Industry, Nat’l Broadcasting Company News (Feb. 11, 2020, 11:20 AM), https://www.nbcnews.com/news/nbcblk/black-entrepreneurs-struggle-join-legal-weed-industry-n1132351 [https://perma.cc/BYZ4-DYX7].
[xxxix] Marijuana Arrests by the Numbers, Am. C.L. Union https://www.aclu.org/gallery/marijuana-arrests-numbers (last viewed Oct. 17, 2021) [https://perma.cc/T7TN-T34E].
[xl] Nick Charles, supra note xxxix.
[xli] Minority Access to Capital and Employment, Cong. Black Caucus Found. (2015), https://www.cbcfinc.org/wp-content/uploads/2016/01/CBCF_MinorityAccessCapital_FactSheet_final.pdf [https://perma.cc/6LWX-3VWC].
[xlii] Noelle Skodzinski, Your State-by-State Guide to Cannabis Cultivation Business Application and Licensing Fees, Cannabis Bus. Times (Feb. 12, 2021), https://www.cannabisbusinesstimes.com/article/state-state-guide-marijuana-application-licensing-fees/ [https://perma.cc/A33A-FJ77].
[xliii] See Real Median Household Income in the United States, Econ. Res. Fed. Reserve Bank Saint Louis, https://fred.stlouisfed.org/series/MEHOINUSA672N (last updated Sept. 15, 2021) [https://perma.cc/7NSQ-YZA2].
[xliv] Chris Edwards, Entrepreneurs and Regulations: Removing State and Local Barriers to New Businesses, Cato Inst. (May 5, 2021), https://www.cato.org/policy-analysis/entrepreneurs-regulations-removing-state-local-barriers-new-businesses#regulations-businesses [https://perma.cc/KCH5-RCYA].
[xlv] Id.; Skodzinski, supra note xliii.
[xlvi] See Boesen, supra note xxi.