By the end of 2018, 20 percent of Americans will live in a state where adults can legally buy and sell cannabis. Yet big problems remain unresolved, including a persistent black market that legalization was supposed to help undermine.
Erin Schwartz | Bloomberg Businessweek
Since Colorado legalized recreational marijuana in 2012, seven other states and the District of Columbia have followed suit. Next year, California, Maine, and Massachusetts will begin sales, potentially tripling the size of the legal pot market. By the end of 2018, 20 percent of Americans will live in a state where adults can legally buy and sell cannabis. Yet big problems remain unresolved, including a persistent black market that legalization was supposed to help undermine. There are also fights between states in favor of legalizing weed and localities that oppose it. And of course marijuana remains illegal under federal law, casting a shadow over the industry.
State tax revenue from marijuana sales exceeds $1 billion. California alone anticipates another $1 billion in annual tax revenue from legalization. But with an impending January 2018 deadline to begin issuing permits, there are signs that growers and retailers may not join the state-regulated system. Hezekiah Allen, executive director of the California Growers Association, estimates that just 3,500 of 40,000 farmers have signed up for permits but says that’s primarily because local governments haven’t issued them or have banned marijuana businesses outright.
This creates problems for state regulators. “We have to work with over 500 different cities and counties over the state,” says Lori Ajax, chief of California’s Bureau of Cannabis Control. “For us to issue a license, we have to make sure it’s not in violation of a city or county ordinance, and because of our size, that’s a challenge.”
California grows 13.5 million pounds of marijuana annually; less than 20 percent of it is consumed there. Growers may have to downsize as new rules ban out-of-state exports. If California’s markets open in January and many existing growers are left out, tax revenue could fall short, and a robust black market will persist. To become legal, marijuana businesses have to secure building permits and water rights and establish record-keeping protocols unfamiliar to an industry that’s long operated in the shadows. “It’s going to take decades for California to regulate its cannabis industry,” says Allen. “It’s been decades that we’ve been making this mess, and it’s going to take us a while to clean it up.”
In Maine, where a legalization ballot measure passed in 2016 by less than 1 percentage point, localities retain broad power to ban marijuana cultivators and retailers, potentially hindering the growth of the state’s cannabis industry. Massachusetts has a July 2018 deadline to issue its permits. That’s already been delayed once. In July state lawmakers established the independent Cannabis Control Commission to develop regulations. Even with the extension, the commission’s chairman, Steven Hoffman, says the July deadline is “a pretty tight time frame.”
Early difficulties are common for recreational marijuana. Nevada faced product shortages when its markets opened in July 2017. Alaska’s first year brought in $1.2 million in tax revenue, short of a projected $2 million. Colorado and Washington both took in less tax revenue than expected in their first year, but revenue has grown every year since and now exceeds projections. Colorado’s effective tax rate is around 30 percent, and Washington has a flat rate of 37 percent. Joseph Bishop-Henchman of the Tax Foundation says these relatively high taxes have allowed a significant black market to persist by making legal pot expensive. States that have legalized more recently have set the rate lower. In Oregon, it’s 17 percent. Maine and Massachusetts have proposed rates of about 20 percent, while California is planning for a 15 percent levy. There isn’t enough data to measure the impact of lower taxes, but Maine state Senator Teresa Pierce believes that Maine will “hit a sweet spot” and be able to undercut black market prices.
As momentum behind legalization grows, a federal crackdown appears less likely. To avoid prosecution under federal law, state legislatures adhere to the 2013 Cole Memorandum, a document issued during Eric Holder’s tenure as U.S. attorney general essentially assuring states that the feds won’t intervene as long as they follow their own rules. But the Cole Memo isn’t legally binding, and Attorney General Jeff Sessions has a long history of opposition to marijuana. “I think the Justice Department may rearrange the deck chairs a little bit, but ultimately, they’re not going to change direction too much,” says John Hudak, a senior fellow at the Brookings Institution. “It seems like a not-so-popular approach to an issue that most Americans don’t see as a problem.”
Marijuana’s ambiguous legal standing limits the ability of businesses to operate normally. Major banks are still unwilling to service growers and dispensaries. Marijuana companies are also ineligible for common tax deductions. This August, New Jersey Senator Cory Booker introduced a bill that would remove marijuana from the Controlled Substances Act, legalize it federally, and withhold prison funding from states with racial and class disparities in their marijuana arrest rates. With Republicans in charge of Congress, the bill is largely symbolic. That leaves states that have legalized pot trying not to attract undue attention from a potentially adversarial Trump administration. “I think as long as we keep our noses clean, we’ll be good,” says Republican Washington state Senator Ann Rivers.