The Center for New Revenue

The bill legalizing medical marijuana in North Carolina, Senate Bill 3, says its Medical Cannabis Production Commission is to have two “industry representatives” among its eleven members.  Maybe the industry doesn’t need representatives on the Commission to regulate themselves. Marijuana sellers can lobby the Commission quite readily, just as they can present their views to the North Carolina House without being Representatives.

The industry naturally wants to maximize profits, and maximize sales.  That’s the American way.  But why should industry representatives vote about how to regulate themselves?  That’s regulatory capture.  The Commission needs to serve the general public interest.  We don’t mandate Duke Energy on the Utilities Commission.  We don’t mandate Jim Beam’s owners on the North Carolina Alcoholic Beverage Control Commission.  We don’t UNC mandate professors on the Board of Governors.  (Students, OK.). The way the bill is written now, the Commission is of the marijuana sellers, by the marijuana sellers, for the marijuana sellers.  

Wait.  Isn’t this like the revolving door?  Prosecutors resign and start representing criminal defendants.  All U.S. Attorneys General I know about practiced law privately before serving the government.  Alcohol regulators worked for liquor interests before working for the state.  

No, putting industry representatives on the Cannabis Commission is not like the revolving door.  It’s worse.  That was then and this is now.  Former prosecutors are rarely suspected of sabotaging their clients’ cases.  LeBron James doesn’t undermine the L.A. Lakers when they play one of his former teams from Cleveland or Miami, does he?  Letting industry representatives regulate their industry on behalf of the public?  No man can serve two masters.  Matthew 6:24.  Not at the same time.

Let’s not put any foxes on the Henhouse Commission.

Cite:  New N.C.G.S. section 90-113.118.

As I hope to appear before the Health Committee of the North Carolina House on May 30, here are notes and links to sources.

Patient health and public health

Patient health

No patients will get legal medicine for years and years.  The Fiscal Note for SB3 says two to three years after enactment.  

But first, 3 people have to appoint a “Production Commission.”  (What if they drag their feet?)  

Second, That Commission decides on “qualifications and requirements for licensure of suppliers.” How do you decide on how to pick winners?  That’s hard.  That’s a can of worms that the bill kicks down the road.  

Third, people apply for licenses.

Fourth, HHS picks 20 semi-finalists.

Fifth, the Commission picks ten winners.

Sixth is when the trouble starts.

Georgia legalized medical cannabis oil in April 2015, with a seven-member commission to pick licensees.  Losers complained, and protested, and went to court.  After all that fighting, the first sale took place over 8 years after the Governor signed the bill.

Unrestricted licensing – where everyone can get a license – would speed time to market, but has proved disastrous in Oklahoma for law enforcement and industry.  

We can get medicine to patients faster if the state keeps control.

That’s about patient health.

Public health

I’m against arresting people for using marijuana, but marijuana makes people nervous.   It’s a slippery slope from medical to recreational.  The government can’t readily describe and limit medical use.  No one can.

Some people overdo marijuana.  Former California Gov. Jerry Brown worried, “how many people can get stoned and still have a great state or a great nation?”  

Baptist teetotaler and Republican prohibitionist John D. Rockefeller Jr., said about liquor: “only as the profit motive is eliminated is there any hope of controlling the liquor traffic in the interest of a decent society.”  That’s what he said as Prohibition ended, and he recommended what we did:  sell alcohol through state stores.  

Louisiana’s land grant universities have a monopoly on producing medical marijuana there (incidentally proving federal illegality a non-issue for state sales).

We can keep the noise down and promote public health better if the state keeps control of medical marijuana. 

More

For revenue, and to keep marijuana in North Carolina, state commerce is the better way. See https://www.newsobserver.com/opinion/article272626684.html.

People sometimes say that a state cannabis monopoly is impossible, because cannabis sales are federally illegal.  Well, some future administration could stop all cannabis sales, public and private, but the federal government we have today won’t shut down state sales.  Louisiana has been selling marijuana for years, through its land grant state universities, Southern U. and LSU.  The federal government hasn’t lifted a finger. Southern is “the only historically Black university in the nation to launch CBD and THC lines of medicinal marijuana products.”

http://www.suagcenter.com/news/4279

Neither of the two  part-time jobs I’m taking on pays much, but it’s still nice to get paid.

One is consulting for a study for the State of California via UCLA and RAND:  “Assessing the feasibility and consequences of implementing a cannabis potency tax in California ($1,082,815); Ziva Cooper, UCLA Cannabis Research Initiative, and Beau Kilmer, RAND Corp., principal investigators.”

The other is co-teaching an in-person class at the University of Virginia with tenured full professor Kim Krawiec four Fridays this fall:  “Marijuana Legalization: Who Gets the Money?”

Marijuana thinking:

Let’s stop arresting people.

If you stop arresting people and make possession legal, commerce is sure to follow.  (Maybe illegal commerce, as in New York these days.)  Not everyone can grow at home.

Once there’s commerce, the population insists on taxation or revenue (in every jurisdiction so far, they have).

The 280E selling expense tax may be the best tax we can hope for.

It’s overbroad, for sure, but it hits advertising and marketing.

1.  Advertising and marketing appeal to kids – and irritate their parents Consumers don’t need the ads or glitz – or the celebrity endorsements.  The 280E Selling Expense Tax makes those kinds of thing non-tax-deductible. 

2.  Big Business advertises more than small business.  Mom & Pop – and social equity licensees – use word of mouth, not marketing budgets.

280E Is a Bastard. So What?

Here are some long-term predictions:  The federal government will not legalize without a tax plan.  The federal tax will not be ad valorem (percentage) at retail (look at tobacco and alcohol).  Federal legalization will come faster if there are significant state experiments (taxing product weight or THC) that make Congress feel comfortable that it knows how to tax cannabis.  

So state ad valorem taxes may be an impediment to federal legalization.  A small one. Non-ad valorem tax experiments (as in New York and New Jersey and several other states) might be helping.

But most marijuana-legalizing are states using ad valorem taxes.  The tax experts left and right say not to.  https://newrevenue.org/2021/09/01/ad-valorem-excise-taxes-are-not-the-way-to-go-for-marijuana/;  https://itep.org/taxing-cannabis/;  https://taxfoundation.org/safe-banking-act-state-marijuana-revenues/

Are retail taxes just easier to collect, and ad valorem lends itself readily to retail collection?

No legalization without taxation seems a safe bet. At least at first, it would be better, I think, to just keep the 280E selling expense tax and NOT add a federal excise tax, but how many votes would that get?

Here’s the question I asked: What are the arguments for and against having the Dormant Commerce Clause apply to commerce in marijuana?

https://chat.openai.com/chat supplied this answer:

The Dormant Commerce Clause (also known as the Negative Commerce Clause) is a legal doctrine that prohibits states from passing legislation that unduly burdens or discriminates against interstate commerce. The application of the Dormant Commerce Clause to commerce in marijuana is a controversial issue with arguments for and against its application.

Arguments for the application of the Dormant Commerce Clause to commerce in marijuana include:

1. Marijuana is a product that can be easily transported across state lines, making it an item of interstate commerce. As such, any state law that regulates marijuana in a way that interferes with interstate commerce would be subject to scrutiny under the Dormant Commerce Clause.
2. Applying the Dormant Commerce Clause to marijuana would promote uniformity in the regulation of the product. This is because it would prevent states from enacting protectionist policies that favor their own marijuana industry at the expense of out-of-state businesses.
3. The application of the Dormant Commerce Clause would prevent a patchwork of inconsistent state laws from creating confusion and uncertainty for businesses operating in the marijuana industry.

Arguments against the application of the Dormant Commerce Clause to commerce in marijuana include:

1. Marijuana is still illegal at the federal level, and the federal government has not yet established a regulatory framework for the industry. As such, it is premature to apply the Dormant Commerce Clause to marijuana until the federal government has acted.
2. Applying the Dormant Commerce Clause to marijuana would infringe on state sovereignty and the states’ ability to regulate the drug as they see fit. States should have the right to regulate marijuana in a way that reflects the values and preferences of their citizens.
3. The marijuana industry is still in its infancy, and the application of the Dormant Commerce Clause could stifle innovation and experimentation by limiting the ability of states to try different regulatory approaches.

In summary, the application of the Dormant Commerce Clause to commerce in marijuana is a complex issue with valid arguments on both sides. Ultimately, the decision on whether to apply the Dormant Commerce Clause to marijuana will likely depend on how the federal government decides to regulate the industry in the future.

The website that contained the California Blue Ribbon Commission Report on Marijuana Legalization, safeandsmartpolicy.org, has disappeared, so I’m posting it here. My website is hardly official, but I was on the Commission, and was Co-chair with Sam Kamin of Regulatory and Tax Working Group.

The Raleigh, Durham, and Charlotte papers put this op-ed below in online and print editions, https://www.newsobserver.com/opinion/article272626684.html#storylink=hpdigest_opinion; it’s been mentioned favorably by Thomas Mills’s PoliticsNC, https://www.politicsnc.com/a-week-of-bipartisan-progress-for-nc/, and featured in depth by a NC Policy Watch, https://ncpolicywatch.com/2023/03/21/north-carolina-should-learn-from-other-places-and-try-to-do-marijuana-right/ (no paywalls).

Excerpts:

The Compassionate Care Act (Senate Bill 3) would unleash the profit motive on millions of dollars’ worth of medical marijuana commerce in our state. But it’s likely to let well-funded out-of-state corporations grab the lion’s share of that money. They would then want to legalize lucrative recreational use quickly and be first in line to sell it.

While state commerce violates free market principles, SB 3’s 10 permanent licenses make for oligopoly, not market freedom. Sure, state delivery and eventually stores would take time and money to set up, but awarding licenses to private sellers “on the merits” or by lottery, SB-3-style, is a recipe for delays and litigation. Four years elapsed between the passage of a medical marijuana law and the first legal sale of medicine in West Virginia and Delaware.

Who gets to sell marijuana?

If the government doesn’t monopolize marijuana sales, then individuals or corporations chosen in various ways, like by lot, on the merits, by willingness to pay fees, by periodic auction, or by voucher privatization will get to sell it.  Voucher privatization failed in Russia because permanent rights were given away all at once, but we can learn from that mistake.  And none of the other options is humming.

Dividing the right to sell up annually per capita among residents avoids licensing disputes and delays.  It spreads wealth, at least unless interstate commerce comes in.

Mechanics are primitive:  The state passes out transferable electronic vouchers to all voters or bright-line tested residents. This is like Alaska’s Permanent Dividend Fund, which sent $1,884 in oil dividends to each qualifying resident of the state for 2014, and keeps on humming.

Say every voter gets one transferable Quota Share. Each Quota Share is entitled to a transferable equal fraction of the year’s total production target, set by the state. 

While actual allocations would be done at the state level, national numbers are available to work with. The RAND Report for Vermont suggests that 19,000 acres could satisfy national demand. That’s 827,640,000 square feet to split among 320 million people. So each Voucher  would allocate a little over two square feet. Say the total crop is now worth $40 billion, as the RAND Report suggests.   Say half of the total consumer price eventually went to pay for legality. Then 320 million people would divide up $20 billion, so an Annual Voucher  would be worth some $62.50. If the 78 million voters in 2014 divided it up, the raw number would be a little over $250 each.

This plan would need a minimum amount of square feet to grow a plant. Maybe it needs to use pounds instead.

Say 300 acres in North Carolina for 5,000,000 voters.  Quota Shares don’t seem like they’re worth much, so only they bring only chump change the first year – and keep costs down for the struggling industry.  Probably a few players will control the industry the first year.

That’s where the Russian lesson comes in.  The only obvious way to keep private power down is not make licenses all and only annual licenses. Industry (the Big Money Boys) will want longer licenses, but they may not have the votes yet.

In later years, voucher prices will probably stabilize.

Excerpts from panel appearance of Shaleen Title of the Parabola Center for the North Carolina Department of Justice webinar in 2022.  https://www.youtube.com/watch?v=ehlLi6hlWRE, 21-minute mark:

We need to make “evidence-based decisions that are not based on fear or stigma but rather the reality of data that we have in front of us.  I also want to say you don’t have to use the same models that other states have used. You can think about fairness and equity and one thing that’s brought up a lot is the idea of potentially state regulated stores. I think we are long overdue for a state to try that model. I think from a public health perspective and equity perspective it makes sense to see if they try that so I hope that is considered strongly.”

25-minute mark:

“I hope you’ll consider being the first state potentially to look at a state-run model . . . especially because we don’t have a state yet that has a successful equitable for profit model.  Maybe we will soon.  I think New York is an exciting one to look at, but we don’t have that yet.”

Here’s the Parabola Center’s story:

“Our team was the first in the nation to devise a clear path for small businesses and historically disenfranchised groups to enter the market. We are here to help create polices that reflect the needs of the millions of people who continue to form the legal cannabis movement.”

Both Republican majority and Democratic minority votes will be needed to pass medical marijuana in North Carolina.  Three medical marijuana grow licensing models from Republican-controlled states are available.

Florida:  Oligopoly requires government choosing a small number of well-capitalized sellers “on the merits”; requires vertical seed-to-sale integration; does not restrict cross-ownership.  Senate Bill 3 follows this model, with 10 sellers.

Oklahoma/Mississippi:  All comers get licenses.  Oklahoma fee is $2,500 per license (currently under moratorium); Mississippi fees vary by size of operation.  Amid excess, Oklahoma voters defeated extension of its program to recreational in a landslide on March 7.

Louisiana:  Sole growing licensees are land grant Louisiana State University and (Historically Black) Southern University, analogous to State and A&T.  They contract out some work.

+++

Other models for sharing the cannabis windfall exist.

California, Massachusetts, New York, and other states:  Some “social equity licenses” are issued to benefit casualties of the War on Drugs.  No program has succeeded yet.

Illinois and other states: A lottery among applicants who are deemed qualified is followed by litigation by applicants deemed unqualified.

Alaska: The Permanent Oil Dividend Fund gives each resident an equal check each year. But in Post-Soviet Russia, voucher privatization of assets failed because of permanent rather than annual privatization.

Patrick Oglesby, 919 619 8838, po@newrevenue.org, NC Bar #7944;
Center for New Revenue, http://www.newrevenue.org;
1830 North Lakeshore Drive, Chapel Hill NC 27514.

https://www.newsobserver.com/opinion/article272626684.html#storylink=hpdigest_opinion No paywall.

A friend asked, “What are your objectives with regard to both medicinal and recreational marijuana?”  Here’s a quick answer.

A long-run objective is good government –  to have laws that people will actually obey.  Since citizens are to going consume marijuana recreationally, I’d say the law needs to adapt to the citizens, since the citizens won’t adapt to the law.  

That’s in line with the view of John D. Rockefeller, Jr., expressed in the foreword to “For Liquor Control”:  “law must always be the articulate organ of the desires of living men. Men cannot be made good by force. In the end, intelligent lawmaking rests on the knowledge or estimate of what will be obeyed. Law does not enforce itself.”

Marginalize the illegal market, too, by enforcing laws that citizens will support.

But that’s for the long run.

Between now and then, some other objectives intervene:

Keep the noise down on medical and recreational marijuana.  Make the drug available, but tamp down on promotion.  Make retailing low-key and discreet, and out of the eyes of kids.  If the 1^st Amendment won’t allow advertising bans, then keep advertising, celebrity endorsements, and other selling expense tax expenses non-tax deductible (as they are now under federal section 280E and will be under conforming North Carolina tax law).

Keep both the medical and recreational wealth in North Carolina rather than letting out-of-state operators grab the lion’s share (as SB3 would do).  Beyond keeping it here, share the wealth here – that is, don’t let rich North Carolinians get it all.  

State retailing, via public health departments or otherwise (state delivery or brick-and-mortar retailing), could satisfy those intermediate objectives quickly.  But selling via health departments will not smooth the transition to careful recreational legalization.

Some of the wording in the new North Carolina medical marijuana bill, SB3, seems not to work.  Litigation to sort out the problem could add years to the already long process of licensing sellers.

The bill puts two “industry representatives” named by the Governor on the “Production Commission” (proposed section 90-113.118(a)(1)b.), but then seems to make it impossible for anyone to be an industry representative on the Commission. The bill says, “Conflicts of Interest — No member of the Commission shall own, operate, have a direct or indirect financial interest in, or be employed by a licensed medical cannabis supplier, or a licensed medical cannabis testing laboratory, or a subcontractor thereof” (Proposed section 90-113.118(l)).   How can someone be an “industry representative” and not “own, operate, have a direct or indirect financial interest in, or be employed by a licensed medical cannabis supplier, or a licensed medical cannabis testing laboratory, or a subcontractor thereof”?

Am I missing something?  This kind of little technical glitch, if indeed it is one, could cause the system to freeze up before it gets started.

The quotes are from pages 9 and 10 of the latest version, https://www.ncleg.gov/Sessions/2023/Bills/Senate/PDF/S3v1.pdf.  The “representative” language first showed up in version 2 of last session’s bill, https://www.ncleg.gov/Sessions/2021/Bills/Senate/PDF/S711v6.pdf; the “conflicts” language first showed up in version 5 — but I just noticed this issue.

Would, say, a lawyer for industry qualify as a “representative”? If the lawyer were paid anything by an industry participant or applicant, she or he would be “employed by” industry, I think, and thus ineligible. And the “indirect financial interest” language is quite broad.

So maybe this issue will get cleaned up as the bill progresses.

My friend and fellow Democrat Thomas Mills predicts:

“I . . . think the legislature will pass some form of medical marijuana bill. The momentum is moving too quickly in favor of legalization. With Virginia heading that way in 2024 and maybe sooner, North Carolina stands to lose millions of dollars in tax revenue if they keep prohibition in place. Enough states have legalized it without seeing any devastating consequences to move forward and I think that will happen this year.”  https://www.politicsnc.com/maybe-im-wrong/

Medical in 2023?

Who gets the money (and first dibs on the recreational money)?  If lobbying works, SB711 aims to give licenses to outfits funded by Florida giant Trulieve and by Russian-funded Curaleaf.

We can do better.  If Democrats can’t figure out how to share this not-even-in-existence wealth, count on us for something other than equity.

The U.S. cannabis industry is not a monolith.  Some players have reason to say that marijuana legalization is best left to the states

Here it is: Federal legalization of cannabis will hurt growers — producers. 

Today, foreign imports don’t come in, but once we legalize, existing trade treaties will automatically oblige us to allow imports. U.S. producers will say, “Ouch.”

Retailers and distributors and to some extent vertically integrated firms (like some) Multi-State Operators don’t join producers in this pain from legalization.

Are growers shrewd enough to be slowing down legalization? Or are the details just too hard for Congress to figure out anyway?