Looking Into the Cannabis Crystal Ball: The Important Issues to Watch as Cannabis Becomes Legal

The following is an excerpt from the new book Marijuana: A Short History by John Hudak (Brookings Institution Press, 2016): 

As marijuana legalization proceeds, new issues will arise and the pressure to deal with existing issues will increase. How local, state, and federal governments as well as international bodies deal with these challenges and questions will determine the future success of marijuana legalization policy.

By the beginning of 2016 in the United States, four states legalized marijuana and for the first time, two states that share a border legalized— Washington and Oregon. Studying how that border influences the market and consumer behavior will be an interesting challenge. Of course it is against federal law to transport marijuana bought in one state to the other (in fact, it is still against federal law to possess that marijuana in the first place). But the reality on the ground is that the state border will be porous and product will move across it. Competition between bordering states will influence public policy and will have an impact on the likelihood of marijuana crossing state lines.

One can imagine states quietly but purposefully engaging in pricing wars in an effort to entice additional consumers, even if those consumers are not supposed to “purchase here and go there.” As more states legalize, the challenge of controlling (or deciding not to control) crossborder transport will become greater. As the 2016 elections proceed, Nevada, California, and Arizona all have robust drives to put legalization initiatives on their ballots. If all pass it will create a substantial western bloc of marijuana-legal states. Such a dynamic will almost certainly induce such price wars, and states as well as the federal government will need to think about how best to respond, either to prevent such behaviors or accept that such behaviors result from market forces that are here to stay.

The spread of marijuana legalization is not a strictly American phenomenon. For some time, the Netherlands was the world’s most progressive pot paradise. Since the mid-1970s the Netherlands has had an odd system that provides marijuana to customers at specific cafes, under an agreement that functions as a type of storefront decriminalization. However, the production and processing of marijuana remain illegal, meaning the legal café market must still rely on an illegal grow market. Such a system involves layers of tolerance from government institutions in allowing the market to exist.

In 2013, Uruguay became the world’s first nation to fully legalize marijuana. The government authorized commercial growers to supply marijuana to pharmacies, and they could dispense marijuana to (nonmedical) customers. The program also authorized homegrows and cooperatives. In a cooperative, people come together and pool resources to grow a larger supply of marijuana, but each member of the co-op is entitled only to a maximum amount of marijuana monthly. Under the Uruguayan model, consumers must register with the government and can only access marijuana through one of those avenues. Despite the 2013 reform, by the beginning of 2016, the Uruguayan system had not yet gotten off the ground owing to delays in implementation.

In Canada, parliamentary elections in 2015 made Justin Trudeau, the son of the late Prime Minister Pierre Trudeau, the nation’s twenty-third prime minister. Shortly after his win, Trudeau instructed the Canadian bureaucracy to prepare to legalize, regulate, and provide access to marijuana, a policy his administration would pursue actively. Canada legalized medical marijuana through a series of court decisions in the early 2000s, and Trudeau made it his mission to move Canada toward wider reforms.

How other nations and international organizations respond to marijuana reform will have a tremendous impact on the future of such policy. As leading global nations like Canada or the United States take more reform-oriented approaches to marijuana, it will surely push the international community toward acceptance or at least tolerance. Also, depending on their responses, international organizations could also push other, more reform-oriented nations toward legalization. In much the same way that efforts in Colorado and Washington spurred greater reform in other American states, national-level legalization may well spur such contagious reforms across the globe.

The one key institution to watch in this process is the United Nations. The UN currently maintains the international standard on drug prohibition via the Single Convention on Narcotic Drugs. The Single Convention remained in place even as nations and American states began to reform their laws. The UN response to this situation could affect nations’ future legalization decisions, particularly those of smaller, less-powerful nations. It could also affect the UN’s own legitimacy. If the response is one of strong and vocal opposition to legalization, and nations continue to legalize despite it, it will put into stark contrast the limited enforcement power the international organization has over policy across the world.

In a similar fashion, the authority of the U.S. government is challenged as more states opt to pursue recreational legalization. As the number of legal states grows, it becomes harder for the federal government to enforce the Controlled Substances Act. At the same time, the shared legal authority of federal and state governments continues to hamper the cannabis industry’s efficient functioning.

The resulting situation in the United States may be worse than either national legalization or national prohibition. Legal realities are loosely defined by executive branch guidance and suggestions from the administration. That guidance fails to answer important questions and oftentimes creates new ones. States are constantly asking the federal government how to deal with many of the problems they face; the answers are almost always insufficient. Members of Congress have proposed solutions to some of the biggest challenges facing states, industry actors, and customers, but that legislation is not acted on.

The reality is that the state of American law at the start of 2016 is absolutely untenable and is inconsistent with American principles of fairness and equal treatment. Federal officials must commit themselves to coherent, comprehensive, and sensible marijuana policy. Until they do, the system will be arbitrary and unjust, and policy will be ineffective.

This incoherent state of affairs influences many topics that demand a decisive federal policy response. One of the most troubling of these issues for the cannabis industry is banking. Under federal law, marijuana enterprises are engaging in an illegal trade, which makes them ineligible to access standard financial products that banks offer: checking accounts, savings accounts, lines of credit, business loans, and so forth. Consequently, most marijuana businesses are forced to resort to a cash-only operation. Cash-only businesses create tremendous security risks for firms, their employees, and their customers and make regulatory auditing of firms more difficult. A cash-only system creates a seriously risky business environment and offers bad actors opportunities for money laundering. Those risks are held in place by a government that refuses to implement a policy fix.

One effort to solve the banking problem came on Valentine’s Day, 2014, in the form of a “guidance” from the Department of Treasury conveying to financial institutions the manner in which they could interact with marijuana businesses. But a love letter it was not. The guidance was vague and did not offer financial institutions sufficient protection against federal action under the Banking Secrecy Act. The industry felt the guidance was not enough to let banks engage with these businesses, so this action by the Treasury did nothing to solve the problem.

For businesses, the tax problem can be just as troubling. Under U.S. tax law, specifically Section 280E of the Internal Revenue Code, any company that traffics in a Schedule I or Schedule II substance is not entitled to business tax deductions. However, the tax code requires all businesses, even illegal ones, to file business tax returns. In order to comply with existing state and federal laws, marijuana enterprises file tax returns annually. Under an agreement with the federal government, firms who fi le taxes—and thus notify the federal government they exist as a business in violation of federal law— will not be targeted for prosecution, unless they commit tax fraud or evasion. The paradox is that marijuana businesses are responsible for all of the standard business taxes, but are ineligible for the same deductions that other American businesses are entitled to. The result is a revenue problem for these firms, as tax burdens can be tremendous. Some young firms report having tax burdens in excess of 100 percent of revenue—an unsustainable operating environment. Legislators, advocates, and state officials have pleaded with the federal government to reform tax laws. These groups argue that if the federal government is tacitly allowing marijuana enterprises to exist, they should also treat them like other businesses for the purposes of taxation. Until the federal government provides a solution, federal tax policy will unnecessarily burden the entire marijuana industry.

Another aspect of the industry that will be important to watch involves growth and consolidation, and how government responds to it. As the marijuana industry matures and as more states, and nations, reform their laws to permit recreational marijuana, market dynamics can change. One worry in advocacy communities is the possible advent of Big Marijuana— the rise of national and perhaps eventually multinational corporations, as occurred in the tobacco industry. Marijuana is a capital-intensive agricultural product that is produced, processed, and sold in similar ways to tobacco products, so concerns about market structure are not unfounded. Could a Philip Morris of marijuana dominate the industry and engage in bad practices and regulatory capture? In the case of Big Tobacco, for de cades the industry’s political power combined with widespread consumer addiction and use allowed corporations to manipulate and hide scientific evidence about the addictive properties and health effects of and carcinogenic compounds in and added to tobacco.

Similar worries concerning marijuana are thus justified, yet, after the Big Tobacco lesson, many people are sensitive to that dynamic in advance. What is more likely is that if a large corporation emerges from the pack, it would face unprecedented scrutiny from both government regulators and industry competitors. That scrutiny could help blunt the type of formal and informal market power that Philip Morris enjoyed. Moreover, aware of the potential for a marijuana power house to dominate the industry, state regulators have armed themselves with a variety of tools to limit the power of such a firm.

As those new, large firms emerge in the marijuana industry, it will be important to see whether those firms have higher rates of regulatory compliance than smaller firms. Those firms may also drive efficiencies and scale and improve market conditions and stability. It will be important to see how large firms behave and participate in the economic arena and whether large marijuana enterprises are known more for the benefits or the risks that corporate consolidation can offer.

The final item to watch in the future is research. Research is essential to the formulation of responsible marijuana policy, including studies of medical marijuana’s efficacy and safety and of the social, public health, and public safety implications of recreational marijuana. There is not a single corner of the marijuana policy world that cannot be aided by additional analysis. There are two things we should consider.

First, will state, federal, and international governments expand their support of medical marijuana research?

Prohibition has rested on what I have called medical marijuana’s trifecta of prohibition in the CSA: the three assertions that marijuana has no medicinal value, is not safe for medical treatment, and has a high risk for abuse. Research must continue to put those claims to the test, and if they are effectively refuted— which many would argue has already happened— government institutions must revise their designation of marijuana.

Second, how will the public respond to new findings on the social impacts of marijuana? U.S. jurisdictions that have legalized recreational marijuana have funded studies or committed to supporting work on a variety of questions about the impact of the substance on their communities. As data and findings pour in from this work, it will be important to understand both the positive and negative impacts and, further, to study public opinion and communities’ responses. Results are unlikely to be black and white—neither everything right nor everything wrong. This research will most likely generate policy recommendations about how to tighten regulations, improve systems, and protect public interests. The willingness of states to adopt such recommendations will be critical to anchoring the legitimacy and effectiveness of marijuana programs and to ensuring sustained public support for legalized marijuana.

A federal policy response is inevitable. It may come in the form of discrete reforms that ultimately mold a broader system, or it may be sweeping in nature. The choices the federal government must and will make will have far-reaching consequences. Will the government proceed with incremental medical marijuana reform or will it accept medical and recreational systems in one fell swoop? The former is probably more likely, given the positions of many members of Congress and a history of presidents hesitant to be aggressive reformers.

What might federal marijuana reforms look like? Will they involve significant federal power? Will the federal government take a largely hands-off, states’ rights approach, or will reform resemble alcohol regulation: broad federal standards supplemented by state power to regulate many aspects of the industry? Such a reform plan would have hugely disruptive effects in existing marijuana-legal states. Currently a state’s medical and recreational marijuana systems tend to look quite similar, but systems across states vary dramatically. Federal intervention and reform could cause upheaval in states forced to implement dramatic regulatory, administrative, budgetary, and market changes to comply with federal laws. Consistent federal marijuana reform will provide numerous benefits, but there will be a lengthy adaptation period in which state systems and the doctors, patients, consumers, growers, business owners, regulators, and others will face significant challenges.

Future marijuana policy is the object of cautious hope. It will almost certainly involve more jurisdictions embracing legal marijuana for a variety of reasons. At the same time, such policy reforms will also come with risks and challenges. The response of governments, industry actors, consumers, and the public will determine the outlines of both the success and expansion of such reforms. Most Americans and many outside the country look at marijuana prohibition and see it as failed public policy. At the same time, many observers are skeptical that full-scale legalization is the right response. The United States and other countries are taking slow steps to figure out how to recover from the consequences of a failed drug war. The spread of full-scale legalization to more American states may be the best precondition for creating the laboratories of democracy where workable marijuana policies will be tested.


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