Question #3 of our seven “Policy Questions” is about “how the state issues licenses (e.g., through a lottery or competitive application process).”
Reasonable minds can differ. Here’s some speculation.
There are trade-offs. One factor among very many is how licensing affects timing and amount of revenue needed to regulate the market. (Maybe revenue is the caboose on the train of regulation, and cash flow is the taillight on the caboose, but you have to start somewhere.)
Cannabis can bring in government revenue to pay for the regulation that legalization entails– but unluckily, not at first. So the market starts off chaotically if appropriators and agencies don’t pre-fund cannabis regulation adequately somehow. Bad for folks in the market. Bad for the public.
No answers, but here are some sticks to throw on the fire – options for licensing – ranked according to earliness of cash flow. But see three undesirable Downsides to this approach at the end.
Options
1. Application fees for limited licenses
States that award cannabis licenses to only some applicants require all applicants to pay application fees, often non-refundable. Early cash flow from those fees can fund some early operations – for instance, to start to sort through applications for those limited licenses, whether winners are hand-picked, A.I.-picked, or chosen by lottery. Revenue is not early enough for the first work, though, and modest.
2. Fees for unlimited licenses
Some jurisdictions take a no-questions-asked approach to licensing and let most anyone have one for a fee. They bring in cash early. Not screening saves time. But setting an appropriate fee is not easy. In Oklahoma, a $2,500 flat fee for all-comers cannabis licensing coincided with underfunded enforcement and a supply glut. Annual fees can go way up as the market matures, and as the illicit market is marginalized.
3. Auctions of limited licenses
Auctions could bring cash in pretty quickly with few disputes. Governments often auction off privileges, like electromagnetic spectrum, fishing rights, and taxi medallions. In Britain’s 19th century India, colonizers auctioned off licenses to sell what they called “hemp drugs” like “ganja.” Licenses were typically for just one year in that low-capital context, with two-months’ worth of the auction fee payable up front, and the rest payable later as businesses earned revenue. Renewal was not automatic. License terms would need to be much, much longer in the 21st century to reflect modern capital practices. Auctions might maximize revenue: Colonial Britain’s 19th century drug policy in Asia was to exploit users (like with the Opium Wars). Auctions still require preparation (hundreds of licenses or just a handful?). Collusion would need to be policed.
4. Fees for limited licenses
Merits: When some official group uses some legislatively-defined criteria to issue licenses, fee revenue can come slowly. Disputes arise: It took eight years after legalization of medical marijuana in Georgia for the first sale to take place (it’s been four years and counting in Alabama). But annual fees can go way up as the market matures.
Lotteries: Lotteries need guardrails in advance (like one-entry-per-firm, capital proof requirements, residency rules, pre-qualification screenings, or anti-flipping rules) that slow down cash flow, and lotteries are designed to leave money on the table.
5. State monopoly retailing
Cash is slow to flow in from government stores, used by New Brunswick, Nova Scotia, Prince Edward Island, Quebec, a few U.S. municipalities, and the Eastern Band of Cherokee Indians. Government stores appeal to public health advocates and might maximize revenue, but they would irritate and aggravate potential sellers, free market fans, and distrustful old-time “Government always gets weed wrong” consumers. Opponents will warn of federal intervention, and President Trump’s drug policies are unpredictable. Suppliers would still need to be licensed somehow.
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Downsides to a revenue-driven approach
1. Other factors
Public health is more important than revenue. And what about administrability, litigation risk, etc.?
2. Bootleggers
Any regulatory costs that legal industry pays are costs that illicit sellers don’t pay. To their competitive advantage.
3. Economic opportunity
Rich people are at an advantage if the state requires cash before business starts. Jefferson, in an agrarian age, wrote, “The small landowners are the most precious part of a state.” Today, in a commercial age, small businesses have their fans.
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This is hard. I wish I had more clues.
The Center for New Revenue 