A recent post here critiqued a recent Virginia marijuana legalization report for downplaying the possibility of state retail sales, pointing out that subnational governments, like Louisiana’s are already “active participants” in American marijuana sales, and saying that while there are good arguments against government marijuana sales (and for them), federal illegality is an argument that can be handled. https://www.huffpost.com/entry/marijuana-under-president_b_8207864
And my post indicated that I couldn’t find Appendix J. I wrote Virginia folks associated with the report, and got not only a link to Appendix J, but a thoughtful and reasoned response on government sales. After pasting that response from Virginia, I’ll paste my reply, but first, here is what I received from Virginia:
Pat,
Good morning – Appendix J is available in a separate set of online appendices, which you can find on this landing page:
http://jlarc.virginia.gov/landing-2020-marijuana-legalization.asp
Our cautionary note on state involvement is because it would be unprecedented for a state to become an active market participant in a commercial, recreational market. No other state has attempted this so it’s not clear what (if anything) the federal response might be. The feds could take no action or view it as a bridge to far. It’s also unclear if the state might be successfully sued by its neighbors. Early on when Colorado legalized, it was sued by two of its neighbors on the grounds that Colorado marijuana was harming their communities and stressing their police focres. In this case, CO was just acting as a regulator; it was not a market participant. The Supreme Court declined to hear the case, which provides some reassurance that a state can regulate marijuana without being sued. However, if a state becomes an active market participant, then there is a different case to be made. It’s not clear how that would play out in court.
It sounds like Louisiana has some limited involvement in the med market, and has not gotten in trouble for it. However, it does sound like they are running some sort of calculated risk. I don’t know all the particulars of LA’s arrangement, but from what you’ve said it sounds like they play a limited role as a middleman between the private producers contracted by the universities and the private, licensed pharmacies that sell to consumers. That limited involvement in medical marijuana is much different from the level of risk we considered when looking at state involvement in a rec market.
I would except LA would be running a much greater risk if it either expanded its role or started being involved in a rec market. Rec markets involve much greater volumes of marijuana than medical. Some of that marijuana will inevitably start being illegally exported across state lines, which then gives both the feds and neighboring states a reason to care about it and make a stink.
I would add that my team are not lawyers ourselves, buy we have consulted with several lawyers on this question. The general consensus, which I hope comes across in our report, is there is a risk to state participation but the ultimate outcome is unknown. Something could happen to a state that becomes involved in the rec market as a distributor or retailer, or nothing could happen.
Happy to talk more if you would like.
Regards,
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Here’s my reply:
Dear [],
Thank you for your reply. I quibble with some of the work in your report, but applaud the effort as a whole. You seem to have spotted the issues; how to weigh pros and cons is not something that can be proven right or wrong.
While I’ve written about state sales and federal illegality, they are not the issue I find most interesting. The choice of an ad valorem tax is where I would start, echoing concerns from think tanks, both left (ITEP research indicates that taxes based on weight will be more sustainable over time because prices are widely expected to fall as the cannabis industry matures) and right(“Taxing based on prices means there is a taxable event with a transaction, allowing for simple valuation. Yet, while it may be simpler to levy the tax based on price, it does not necessarily offer an equitable solution.” – Tax Foundation). But that’s for another day.
But for the issue of state retailing, here are some reactions to Appendix J:
“In Canada, the Ontario state government attempted to establish its own retail stores but gave up after a year, largely because of logistical challenges.”
My understanding is instead that Ford’s party won the election and made an ideological choice. That said, the roll out in come provinces has been tricky.
“While the U.S. Department of Justice has tolerated states that regulate commercial marijuana (and hence enforce restrictions on the substance), it is unclear how the department would respond to a state taking on an expanded role and actually distributing and selling marijuana. Virginia could also face legal challenges from residents and neighbor states if it implements a government control model.”
Who can predict what will happen? But the first concern seems remote in a Biden Administration. And like Colorado’s neighbors, Texas didn’t get very far suing other states recently, this time to change their 2020 election results – a different case, and there were two dissents, but still. This seems like excess of caution.
“The government control model would also take much longer to implement than a fully private approach because the state would have to establish its own operations before the commercial market could open. State government usually moves at a slower pace than the private sector, so it would likely take longer to establish operations. The state would be further slowed by the sheer volume of additional work required.” And it would cost more up front.
Good points, but your private roll-out is looking at two years. Newly licensed growers won’t have material ready to sell for a while. I look at China, which can make things happen fast. The process of licensing will drag on and on, I think – if you can’t prevent appeals, state stores could actually be a shortcut.
In one approach, “the state would need to lease or purchase hundreds of properties” and incur other upfront expenses.”
But you note that government sales, in the long run, can be the most profitable.
Can’t you issue a bond? It’s an investment that would take care of the upfront costs and prove lucrative in the long run.
In another approach, “[t]he state could try to contract out retail, but this would likely be too time consuming and costly.”
Not understanding why. Picking retail licensees might be time consuming and costly, too.
Look, these are all judgment calls involving balancing. The marijuana community is suspicious of government, and would resist state sales. Marijuana sellers don’t want to let government take business, and they are the ones making campaign contributions these days, so even if you were less skeptical of state stores, the Legislature might get its own ideas.
It’s more useful to think about that ad valorem tax base than about this issue of government sales.
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Meanwhile, are you all not members of the multi-state group? https://www.cann-ra.org
Again, thanks for your thoughtful reply – and congratulations on your good work.
With highest regards,
The Center for New Revenue 