With cannabis rescheduling potentially happening at some point in the next few years, a big unknown is still what that would actually look like for existing markets. But, according to one researcher, Washington state’s decade-old regulatory framework for its legal market could serve as a solid launch pad.
The state’s approach, characterized by strict licensing controls and a prohibition on vertical integration, exists as a stark contrast to many more liberal markets elsewhere. And one of its key strengths, according to economist Boyoung Seo, an assistant professor of business at Indiana University who studies marijuana industry regulations, is that the system has its roots in alcohol control.
“What (Washington regulators) did was basically took the regulatory regime for hard (liquor) and applied that to marijuana,” she told Green Market Report.
And that approach has resulted in a tightly controlled cannabis market with a solid foundation to build on.
One of the most distinctive features of Washington’s regulatory framework is its prohibition on vertical integration within its marijuana industry.
“If you grow, you can process it. That part is allowed,” Seo said. “But what’s really important is that if you grow, you cannot directly sell it to the consumers, meaning you cannot own a dispensary – that’s strictly forbidden.”
The motivation behind that is likely rooted in public health concerns, she said. However, states must also consider the potential economic benefits. As the industry has evolved, its fiscal impact has become more significant.
“I think marijuana now basically provides (around) 1% of the total state revenue (in Washington and Colorado),” Seo said. “So, as the market became more mature, more stable, I think now people kind of look at it like, ‘Okay, about 1% of the total state revenue now comes from recreational marijuana, which is big.’”
That’s despite very different rules for obtaining licenses to operate a cannabis business.
“If I were to live in Colorado, I can obtain the license as long as I don’t have a criminal background or something like that,” she noted. “But in Washington, that’s almost impossible now, because state actually puts a quota on how many retailers can be in this (state), and how many growers there can be, how many processors there can be.”
On the other end of spectrum, Colorado allows an unlimited number of cannabis business licenses. How significant is the difference? According to Seo’s research, Washington averages just 4.8 cannabis dispensaries per 100,000 residents, versus about 14 per 100,000 in Colorado.
Counterintuitively, that more restricted market in Washington has coincided with lower average cannabis prices than Colorado, which Seo’s analysis showed was, on average, higher in 2022.
It all creates a balancing act for policymakers.
“You kind of want people to use it so that you can generate lots of state revenue,” she added. “But at the same time, when people use it a lot, they spend more. So, I think there is a little bit of a dilemma there.”
Additionally, she cautioned that there’s still a lack of comprehensive research on marijuana’s effects.
“We don’t really have a good measure to put a dollar sign on how much cost a society needs to take on if one more ounce of marijuana is consumed,” she said. “A dollar figure does not exist because basically no research was allowed before this legalization. So, there’s still accruing evidence.”
Still, states have various regulatory tools at their disposal, such as taxing by sales value, weight or potency. But as potential federal rescheduling looms, states may need to reevaluate their approaches.
“If it is rescheduled, technically, it basically becomes legal,” she noted. “It’s not like, illegal in every state, but states have the power to make it illegal.”
Some states are already preparing for this possibility. Utah, for instance, has indicated that “marijuana will remain a schedule one substance in Utah without legislation,” according to a presentation by the state’s legislative research and general counsel.
Other states, such as North Carolina, already have laws in place that would essentially mirror what federal scheduling does, “unless the commission or whatever the drug authority in the state objects,” she said.
“Each state can basically decide what they want to do,” she said. “They can also legalize it and control it, or they can keep it not allowed.”
Regulators’ experience dealing with alcohol appears to have shaped a more restrictive approach to cannabis licensing and sales. Read More