Some State Licensing Approaches Can Fuel the Illicit Cannabis Market
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Though cannabis remains federally illegal, 37 states and the District of Columbia have passed medical cannabis laws (MCLs), and 18 have passed adult-use recreational cannabis laws (RCLs), creating a “state legal” U.S. cannabis market estimated at $18.1 billion. While these states have taken varied approaches to licensing cannabis businesses, until now there has been limited research on cross-state licensing approaches. A new study led by an economist from the University of Massachusetts Amherst, however, provides a systematic analysis of the current licensing strategies taken by all states that have passed MCLs and RCLs.
In their paper, recently published in the International Journal of Drug Policy, Lucy Xiaolu Wang and Nicholas J. Wilson construct comprehensive data on cannabis business licenses offered in each state, as well as metrics for license categories, cost and issuance volume. By analyzing patterns between these metrics and considering how long ago the states implemented MCLs/RCLs, qualitative licensing aspects, state ideology and voting preference, and state cannabis taxation data, Wang and Wilson found that states tend to license medical cannabis more restrictively than adult-use cannabis and that states that implemented MCLs/RCLs earlier tend to offer licenses in more categories, at lower cost, and in greater volumes.
Wang, an assistant professor of resource economics and faculty associate in the Computational Social Science Institute at UMass Amherst, and Wilson, a master’s student at the Ludwig Maximilian University of Munich, further found that although states that implemented MCLs recently lean conservative and Republican, they did not observe clear relationships between ideology or voting preference and licensing policy.
“While the ‘early mover’ states are some of the least conservative (e.g. California, Colorado, and Washington), in recent years multi-category or low-cost licensing regimes have also been implemented in conservative-leaning states (e.g., Oklahoma and West Virginia),” write Wang and Wilson, who are both also affiliated with the Max Planck Institute for Innovation and Competition during the study period. “Further, the restrictive-MCL, broad-RCL approach taken by Illinois and Massachusetts (both less conservative, Democrat-leaning states) may inﬂuence these results, which only consider MCLs. Another consideration is that most states without MCLs (e.g., Idaho, Indiana, Iowa, Tennessee, and Wyoming) lean conservative and Republican.”
Wang and Wilson also examined state cannabis taxation policies, finding that adult-use cannabis is taxed as or more heavily than medical cannabis in each state with both MCLs and RCLs. While some states with MCLs exempt medical cannabis from state sales tax, as is a common precedent for medical products, most levy excise duties – sometimes as a “special sales tax” – instead of, or on top of, state sales tax. They also found that non-price duties are levied in 11 states, either on wholesale value or on non-price metrics such as weight of product sold, THC content or potency, or dispensary revenues. The authors write that “the choice to impose non-retail price taxes could be inﬂuenced by factors such as regulatory capacity, interventionist appetite or market structure.”
The researchers conclude by examining how one challenge facing policymakers that is indicative of the complexities of state licensing is the persistence of sizable illicit markets in some states, often tied to high prices of illicit cannabis. Wang and Wilson cite reports that Oklahoma, a recently legalized state which is following an approach of low-cost, high-volume licensing, has reportedly become a major exporter of cannabis, fueling the illicit trade in other states. “As long as cannabis remains federally illegal and licensing remains the responsibility of states, each state may continue to act based on their own estimation of the trade-oﬀs involved, which can carry negative externalities for others,” they write.
The complete study, “U.S. State approaches to cannabis licensing,” is available via open- through July 29. Detailed state profiles for all states are included in the online appendix and are also available in the accompanying Max Planck Institute discussion paper.
This article has been republished from materials provided by University of Massachusetts Amherst. Note: material may have been edited for length and content. For further information, please contact the cited source.