Regulating Legal Cannabis in 2019

Seattle, USA - July 14, 2016: People passing a State Legal Marijuana shop sign on 2nd avenue late in the day in downtown. (Seattle, USA - July 14, 2016: People passing a State Legal Marijuana shop sign on 2nd avenue late in the day in downtown., ASCII

(Editor’s note: This story will also appear in the March/April edition of StateWays magazine.)

Seven years have passed since Colorado and Washington became the first U.S. states to legalize recreational cannabis. In that time, the industry has expanded immensely, adding eight more states and Washington D.C. Around 60% of Americans now approve of pro-pot laws, according to recent surveys, which is more than double the percentage who supported some form of legalization in 2000.

More states will pass recreational laws in the next few years. Many already have bills moving through their legislature. The momentum behind cannabis is immense, and the support has never been higher.

But in the past seven years, so too has cropped up a number of public safety, economic, and procedural issues. Some have been present from the movement’s beginnings, yet remain unanswered. For instance: How can law enforcement reliably measure a cannabis DUI? Officers still lack an exact method.

Other issues have emerged as this newer market expands and matures. One state in particular has recently made headlines with problems faced by its cannabis industry, reflecting broader issues that will affect legal pot from coast-to-coast.

Issues in Oregon

The Beaver State was among the second wave of states to legalize, taking the plunge with Alaska (and Washington D.C.) in 2014.

When a new market forms, nobody can enter with all the answers. Those two states, plus Colorado and Washington, dove headfirst into shaping the future of American cannabis, with the understanding that there would be road bumps to smooth out along the way.

News broke this February that Oregon’s legal cannabis industry has unintentionally built up a 6.5-year surplus of product. In another eye-opening report, the Oregon Secretary of State’s Office found that the escalating number of approved licenses has caused widespread inspection problems.

Namely, only 3% of retailers and 33% of growers have received a compliance inspection. Meanwhile, the state still lacks a verified testing mechanism on the medicinal side.

To the surplus issue, Mark Pettinger, the Oregon Liquor Control Commission’s (OLCC) spokesman for recreational marijuana, explained that the OLCC “completed a supply-and-demand study, and it outlined a theoretical 6.5-year surplus of cannabis in the legal system, given consumption patterns of Oregonians. Theoretical doesn’t account for fluctuations in future commodities or demand.”

“In terms of overall supply, that’s not 6.5 years of just flower — but of everything,” he added. “The assumption is that value-added-goods like extracts and edibles have a longer shelf life.”

Oregon has issued a de facto moratorium on new licenses, and is telling new applicants that they have been placed in a queue.

The issue with insufficient testing and inspections, which also involves the Oregon Health Authority, seems to arise from the sort of staffing shortages that face newer industries.

“One challenge is that we have not had the full compliment of inspectors onboard,” Pettinger said. “There’s been turnover. It’s like any startup business. Right now it’s more about trying to get people onboard. That’s taken a fair amount of time, because first we needed to develop the standards and processes for inspectors.”

“As we’ve developed that, the inspecting process has become better, more efficient,” Pettinger added. “Remember, it’s a completely new process, so it’s probably going to go slow at first. It’s not something that’s already codified. On the alcohol side, they have had their process for 80 years. They’ve been able to develop and change and tweak it. We’re still building the process for ourselves.

Legislation Versus Ballot

One aspect that differentiates the newer wave of states legalizing has been the method of approval. Whereas trailblazers like Oregon have legalized through voter ballot, new pot laws are now coming out of state congresses and the governor’s desk.

Vermont set the standard here. In 2018 the state became the first that legalized through an act of legislature. Also noteworthy is that the Vermont law did not immediately establish commercial sales, but created a committee to explore the future possibility.

Several policy experts have lauded this strategy.

“The ballot process doesn’t lend itself to a lot of debate or compromise,” says Beau Kilmer, director of the Drug Policy Research Center at RAND, which helped Vermont in creating the legislation. “And depending on the state, it can be quite difficult to make changes afterwards.”

Agreeing with Kilmer is Jon Caulkins, formerly of the RAND Drug Policy Research Center, now the H. Guyford Stever Professor of Operations Research and Public Policy at Heinz College at Carnegie Mellon University. “In general, states underestimate what they’re getting into,” says Caulkins. “Remember that a private industry has a huge motivation to get laws changed for profit. There’s a lot of vulnerability for industry capture. The private industry will likely end up having a larger voice than the regulators do.”

Kilmer praised Vermont’s more-cautious approach, and pointed even farther north for more prudent practices.

“Canada has wholesale control over state stores,” Kilmer says. “That makes a lot of sense. It’s probably better for public health than the privatized market.”

Caulkins believes cannabis should be a state-run monopoly with “public health-oriented objectives. The private industry is not going to care as much about public-health objectives.”

Following Footsteps

States like Vermont that followed in the legal cannabis footsteps of other states have had the advantage of learning from the unintentional errors of pioneers.

Speaking of the recent testing shortfalls in Oregon, Patrick Delaney, commissioner of the Vermont Department of Liquor and Lottery, says, “Basically the lack of availability to do lab testing boils down to projecting the production model. When you put together a business plan, if your production model is mistaken, and you severely overestimate or underestimate, that’s what happens.”

Complicating the math is that labs require significant capital investments, and employees of immense skillsets. Still, Delaney believes that the issue with understaffed labs will correct itself as more entrepreneurs recognize the need and enter the market.

He also points out how the commercial models currently proposed in Vermont’s two Congressional bodies take into account the current, troubling issue of plummeting legal cannabis prices.

“Vermont has focused on tax rates that are low,” Delaney says. In the state House bill they’re 11%, in the Senate, 10%. For comparison, Colorado has a 15% tax rate.

“I think the general understanding is that you want to compete with the black market,” Delaney says. “The goal is to eliminate the black market, but that’s not realistic. So how can you compete effectively? You have to come down to their price. If not, you’re doomed to fail at retail.”

As the legal cannabis industry spreads across America, Delaney sees its success depending on three key differentiators from the black market. Under the umbrella of providing a rational control model, he believes states must protect public safety; create a level of revenue to justify the investment of time and energy into that process; and ensure the salability of the product, along with its evaluation and testing.

“It’s a perplexing, complicated process to become relevant. If you’re not relevant, your whole business model is not relevant,” Delaney adds. “Remember, California just generated half of their projected tax revenue.”

Why? One reason is likely because “most illegal cannabis still comes from the legal states,” says Caulkins of Carnegie Mellon University.

Broader Concerns

Which brings up an important fact: one user’s entire year worth of cannabis supply can fit into a 20-ounce beer can. Which is to say that the product is rife with risk for illegal transfer. States will need to determine how important it is to keep product from crossing borders.

As will they also want to keep an eye on the THC levels of products.

“Much of the health research on cannabis is based on a daily user using 20-to-50 milligrams of THC each day,” Caulkins says. “But now we’re seeing daily users use around 1.5 grams, or 300 milligrams, per day. And we don’t have much evidence about what that does to a user long term.”

Sometimes users who ramp up their drug intake will also naturally increase their tolerance to that substance. Other times, like with cocaine, an increased tolerance does not accompany greater usage — just worsening health effects. Truth is, due to lack of proper research, we do not yet know how greater cannabis dosage rates will affect daily users in the long run.

Meanwhile, high-potency products like vapes, dabs and edibles continue to hit retail shelves.

Delaney of Vermont believes that the THC potency issue will play out like alcohol’s ABV, as consumers become more educated. “Most consumers already make drinking decisions based on issues like the immediacy of intoxication, the concentration of alcohol, and prefer lower-ABV,” he says. “I believe the same informed decisions will take place with cannabis and THC levels once consumers learn their comfort levels.”

Caulkins of Carnegie Mellon sees THC levels as an alternative tax system. Just like how higher-ABV products receive a higher tax rate, so too could cannabis products get taxed based on their THC potency. This is especially important as the price of legal cannabis plummets. In 2015 the cost was around $2,000 a pound; now it’s below $800.

“Nobody knows the best way to tax cannabis right now,” says Kilmer of RAND. “A lot of jurisdictions are taxing based on a function of price. The advantage of that is that it’s easy to apply. The disadvantage is that as prices go down now, so does the state revenue.”

Kilmer also believes that cannabis could be taxed on THC levels. “That’s not sensitive to declines, and because governments still don’t know much about the long-term health consequences of high-THC products, it might make sense for a progressive THC tax to nudge people towards lower-THC products.”

Sharing information

All these concerns, and others unmentioned (labeling, underage use, overdosing, etc.) speak to the importance of education and the sharing of information among regulators, licensees and other industry professionals.

Oregon in January hosted the second annual Cannabis Collaborative Conference. Thousands of industry professionals attended. Keynoters included Steven Marks, executive director of the OLCC, and Rick Garza, agency director of the Washington State Liquor and Cannabis Board.

The OLCC took the opportunity during that conference in Portland to host a side event with information sessions for state licensees and medicinal growers. Overall, Oregon does outreach with its licensees whenever it can, says Pettinger.

“Generally, we have a positive reputation in regard to licensees,” he adds. “They realize the volume of work we have and that we need additional resources.”

Advice for the Future

So how can states in the first steps of considering or creating legal cannabis markets best navigate these tricky waters? Pettinger of Oregon has advice.

“You have to be nimble because this is not as codified as the alcohol industry. Changes are going to come,” he says. “For instance, in this industry there is a lot of pent-up entrepreneurialism from years of the industry operating under the radar. These people are pushing and doing stuff not necessarily to break the law, but to bring out new products for consumers, and sometimes these entrepreneurs are out front before the regulators can catch up.”

“Allow for more time to build it out because it will take more time then you think,” Pettinger adds. “Focus on building a strong foundation and framework. You won’t get it done overnight. Consult with other states and industry members for advice. There’s vastly more knowledge now in the industry then there was just five-to-six years ago.”

Kyle Swartz is editor of Cannabis Regulator. Reach him at kswartz@epgmediallc.com or on Twitter @kswartzz or Instagram @cheers_magazine. Read his recent piece Legal Cannabis Makes (Minor) Headway in Washington D.C.