Author: Pat Oglesby

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.

The new North Carolina medical marijuana bill, SB3, contradicts itself.  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.

The “indirect financial interest” language seems broad enough to catch any “industry representative.”

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?

Starting in late 2009, I tried to be the world’s expert on marijuana excise tax policy. But now, at 75, I haven’t needed to try for a while. That’s because first-rate tax policy scholars have taken up that work.  They cheer me up.  Here are writings, roughly in reverse chronological order, showing why I have been easing up.

Richard Auxier of the Tax Policy Center, https://www.taxpolicycenter.org/publications/pros-and-cons-cannabis-taxes (with Nikhita Airi).

Ben Leff of American University Law School, https://www.bu.edu/bulawreview/files/2021/07/LEFF.pdf. Ben is the only law school tax professor who has studied cannabis excise taxes — despite the stigma of the drug and the lack of academic interest in state taxes, excise taxes, and low-revenue taxes. Bravo.

Carl Davis of the Institute on Taxation and Economic Policy, https://itep.org/?s=cannabis#gsc.tab=0&gsc.q=cannabis&gsc.page=1 (Richard Phillips and Misha Hill contributed to some of this work.)  Start with https://itep.org/taxing-cannabis/.

Ulrik Boesen, when he was at the Tax Foundation, https://taxfoundation.org/individual-and-consumption-taxes/excise-taxes/marijuana-taxes/.  Start with https://taxfoundation.org/recreational-marijuana-tax/.

Jane Gravelle and Sean Lowry from the Congressional Research Service way back in 2014, https://newrevenue.org/wp-content/uploads/2015/01/fed-mj-tax-r43785.pdf.

Lots of drug policy scholars (like Kleiman, Humphreys, Caulkins, Kilmer) have looked at cannabis revenue policy too, and plenty of interested industry people do, but my own background in tax leads me to appreciate especially the tax policy specialists who have taken up this work. There’s plenty still to do, and our wide variety of state experiments will help Congress figure out what to do eventually.

A greater need now for me is to follow licensing revenue and the whole licensing process, where policymakers are flailing.  Nothing works – on the merits, lotteries, social equity – all end with arguable unfairness and time-consuming appeals.

In my state, North Carolina, the State Senate has passed, with negligible debate, a huge medical cannabis bill, SB711, licensing only 10 vertically integrated marijuana sellers, who will be well-heeled investors.  We can do better.  So watch this space.

But I won’t phase out of marijuana tax policy altogether, because I want to keep harping on the salutary effects of the 280E selling expense tax, which keeps the noise of marijuana commerce down, and hits small word-of-mouth merchants much less than it hits big marketing operations and celebrity endorsers. And I may try to put together a history of cannabis taxes, one that starts with British India in the nineteenth century.

But I’m glad that younger and smarter people are keeping up with hemp drug excise taxes.

After spending weeks writing an article warning of the dangers of interstate commerce or federal legalization for states that (1) tax marijuana by weight (Alaska, California, Colorado, Maine, and Nevada) or (2) collect pre-processing (Canada; Alaska, California, Colorado, Illinois, Maine, and Nevada) and publishing it in Tax Notes, I remembered that New Jersey did both.

I’ve made lots of mistakes before; and list some here:  https://newrevenue.org/2015/01/28/3-errors-in-laws-to-tax/.

Yesterday, I posted a hope that the Dormant Commerce Doctrine does not apply to federally illegal cannabis.

My friend Rob Mikos, a law professor at Vanderbilt and probably the leading expert on marijuana federalism, graciously responded to an email copying that post, writing, “I agree with the policy argument, but not the legal one.”

He points out that the Dormant Commerce Doctrine is old and settled law, operating in the face of the 10^thAmendment for centuries.  He’s the expert, so I’ll back off from any hope that as a practical matter the 10^th Amendment will come to the rescue of state freedom here.

Continue reading “Partial abandonment of hope on DCC and marijuana”

The Dormant Commerce Clause cases that force states to accept out of state owners for local cannabis licenses strike me as wrongly decided.  

Congress’s faint, implied, “dormant” display of intention to open markets in an illegal substance to all comers seems dwarfed by the 10^th Amendment’s express and overriding reservation of power to the states to do whatever the heck they want.  “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The Constitution doesn’t prohibit states from regulating commerce – Congress can allow them to regulate commerce, though it rarely does.

Continue reading “The Dormant Commerce Clause and Marijuana”