Analysis of New Mexico House Bill 12: The Cannabis Regulation Act
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Analysis of New Mexico House Bill 12: The Cannabis Regulation Act

Recently proposed legislation in New Mexico represents the most streamlined legislative proposal for marijuana legalization in the state to date.

New Mexico House Bill 12 of the 2021 legislative session would implement the Cannabis Regulation Act and the Cannabis Tax Act.  The proposed legislation incorporates substantial improvements and simplifications over previous legislative proposals for an adult-use cannabis market in New Mexico, including Senate Bill 115 from the 2020 legislative session, which Reason Foundation reviewed previously.  After Senate Bill 115 failed to secure passage last year, Gov. Michelle Lujan Grisham expressed disappointment and stated that marijuana legalization in New Mexico was “inevitable.”

House Bill 12  (HB 12) represents the most streamlined legislative proposal for marijuana legalization to date in New Mexico and comports most strongly with the recommendations in Reason Foundation’s “Conceptual Framework for State Efforts to Legalize and Regulate Cannabis.”

This analysis examines key provisions in the bill and highlights the proposal’s strengths as well as possible areas of improvement.

Highlights and Positive Aspects of New Mexico’s House Bill 12

On-site consumption: HB 12 would allow for on-site cannabis consumption lounges hosted by some retail outlets in accordance with local zoning laws. On-site consumption has become an important method for ensuring consumers have a legal method for consuming the cannabis they are legally allowed to purchase and possess without transgressing provisions that prohibit consumption in public places.  Tourists and convention-goers, for instance, have found they are unable to legally consume cannabis when visiting states with legal marijuana because they maintain no private residence.  Likewise, renters often have no place for legal consumption in cases where the landlord prohibits the use of cannabis on their property.

Outdoor cultivation: HB 12 would permit licensed producers to cultivate cannabis outdoors with proper security protocols in place. This allows aspiring entrepreneurs to enter the market at much lower initial capitalization rates and thus facilitates a more dynamic marketplace.

No limit on licenses: Section 6(H) and Section 8(B) prevent the Cannabis Control Division from setting an arbitrary limit on the number of licenses that may be awarded. Other states that have established these limits have routinely witnessed corruption scandals as applicants attempt to woo regulators or oversight boards to award one of the limited licenses.  License caps also limit competition and ultimately manifest as reduced choice and potential monopoly pricing facing consumers.

No plant count limit: The bill would allow licensed producers to operate at a scale they can manage in order to ensure profitability. Although few states impose plant count limits on licensees, these limits unnecessarily raise the fixed costs facing those licensees and limit their ability to rebound from adverse events such as crop failure.

Homegrow and possession: HB 12 would permit residents to cultivate up to six mature cannabis plants in their homes and clarifies that in households with multiple individuals, there is an upper limit of 12 mature cannabis plants permitted. A few states have permitted homegrow but left ambiguity about whether the plant count limit applied to an individual or a household.  Similarly, HB 12 clarifies that an individual can possess up to two ounces of cannabis or 16 grams of cannabis concentrate on their person, but they can also maintain quantities in excess of these amounts at their home if stored securely.

Local control: HB 12 sidesteps issues of local government control that have plagued certain markets like California, where local governments can pass ordinances prohibiting cannabis facilities from their jurisdictions and roughly four-fifths of the state’s local governments have done so.  This creates a scenario in which citizens have voted for legal access to cannabis but effectively have no such access within a reasonable distance from their homes.  California regulators attempted to mitigate the access issues by allowing home deliveries to any jurisdiction in the state, which prompted a contentious lawsuit from a group of California cities.  HB 12 makes it clear that local governments cannot prohibit cannabis operations or deliveries altogether, but can reasonably regulate the time, manner, and operations of a business.

Expungement: The expungement provisions in Section 32-34 comport extremely well with Reason Foundation’s recommendations to automate the expungement process to the greatest extent possible while still giving prosecutors some leeway to contest specific cases if there are extenuating circumstances. The legislation also sets hard timelines for prosecutors to complete their reviews and voice objections so that justice will not be unreasonably delayed.

Employer Protections: Section 38 follows other state legalization statutes by enshrining the rights of employers to enforce drug-free workplace laws and protect those employers who hold federal contracts.

Interstate Compacts: Section 42 is a truly novel aspect of HB 12 that grants advance authorization for the governor to enter into interstate compacts for the import and export of cannabis across state lines in the event this activity gains acceptance under federal law.

Excise Taxes: Sections 51-53 set forth the excise tax schedules for the commercial cannabis industry. These sections impose a nine percent excise tax at the state level and authorize municipalities to implement an additional three percent tax and counties to implement an additional four percent tax.  At maximum, retail marijuana transactions would be subject to a 16 percent excise tax and HB 12 imposes no wholesale tax.  This structure generally comports well with Reason’s recommendation to eschew wholesale taxes and target retail excise taxes at 15 percent or less in order to successfully displace black-market cannabis suppliers.

State Income Tax: Section 61 of the bill makes adjustments to New Mexico’s corporate income tax laws to clarify that expenses disallowed for a deduction on federal income taxes under Internal Revenue Code 280E would be permitted on state income taxes for New Mexico’s cannabis industry. The exclusion of the “ordinary and necessary” standard for expense deductibility under 280E is among the largest barriers to the cannabis industry, so this provision is essential in states that impose corporate income taxes.

Improvements to Occupational Licensing: Sections 9(E) and 10-11 set forth the costs and requirements for workers who wish to be employed in the cannabis industry. These sections are a major improvement over previous legalization bill drafts in New Mexico such as SB 115 of the 2020 session, which would have created the most extensive occupational licensing requirements in the world for cannabis workers and served as a major barrier to entry.  The provisions in HB 12 would focus primarily on ensuring sales agents properly check patrons’ identification and do not divert marijuana to minors.  The cost of acquiring a cannabis server permit would additionally be nominal at $35.

Cannabis Regulatory Advisory Committee: Section (3)(F) requires regulators to convene a Cannabis Regulatory Advisory Committee with the explicit charge of “ensuring a regulated environment for commercial cannabis activity that does not impose unreasonable barriers that would perpetuate, rather than reduce and eliminate, the illicit market for cannabis.” This is a highly laudable provision that will keep regulators focused on one of the primary policy goals of legalization.

Expedited Licensure: Section 6(L) would allow existing medical licensees in good standing to quickly acquire adult-use licenses without a cessation of operation.

License Fees: The license fees specified in Section 9(A) are highly competitive when compared to other jurisdictions permitting adult-use cannabis. Lawmakers should remain cognizant that licensing fees serve as an initial barrier to entry and, when excessive, can prevent entrepreneurs who are not well capitalized from accessing the market.  HB 12 contains significant language encouraging individuals from communities disproportionately impacted by the war on drugs to participate in the industry and high license fees would otherwise be an impediment to this policy goal.

Areas for Improvement In the Bill

Producer vs. Manufacturer: The definition of “cannabis producer” in Section 2(J) appears to allow a producer to both cultivate cannabis and manufacture cannabis products whereas “cannabis manufacturer” is a separate license type defined in Section 2(I) as one that manufactures and packages cannabis products. The overlap in these license types is atypical and it appears the primary motive for acquiring a manufacturing license is to package products for retail sale.  Most states either separate the cultivation and manufacturing functions entirely within their licensing framework or consolidate them entirely.

New License Types: Section 6 (D) specifies the eight license types the department is authorized to award but gives no authority for the department to create additional license types as many state marijuana legalization statutes have done. This provides the department with limited flexibility to address emerging needs in the marketplace as they arise.  For instance, the Michigan Marijuana Regulatory Agency has used its authority to create new license types to address marijuana-related events and standalone consumption lounges.  Language to this effect should be included.

Home Manufacturing: Section 25(A)(9) and Section 27 appear to be in conflict. Section 25(A)(9) lists as a protected act an individual’s right to manufacture cannabis extracts at home.  However, Section 27 prohibits an individual from intentionally producing cannabis products.  According to the definition of “cannabis product” in Section 2(L), an extract is a cannabis product.  These two provisions need to be reconciled.

Issues in the Bill Worth Additional Consideration 

Low-Income Subsidy Fund: Sections 4 and 45 relate to the creation of a subsidy fund whereby the state would help finance the procurement of medical cannabis for low-income patients. To the extent low-income individuals rely on cannabis for medical treatment, the motive behind this provision would appear consistent with other forms of public support for healthcare to low-income households.  However, these provisions create significant challenges in the context of marijuana.  Specifically, marijuana remains a Schedule 1 controlled substance under the federal Controlled Substances Act. As such, any organization that produces, distributes, or finances the acquisition of such substances can be deemed a federal criminal organization and could become subject to penalties under federal racketeering laws.  This program could thus subject the state’s officers and employees to arrest by federal law enforcement and subject the state’s assets to seizure.

Reason Foundation has previously warned against proposals to create state-run cannabis retail facilities for precisely this reason.  Although the low-income subsidy program is a novel approach to meet individuals’ medical needs without relying on potentially addictive prescription painkillers or other treatments, it would make New Mexico highly vulnerable to adverse federal action.

Racial Diversity or Disproportionate Harm: Section 3(C)(8) directs the department to promulgate rules to encourage full participation in the industry by representatives of communities disproportionately impacted by the war on drugs. Similarly, Section 3(C)(9) requires rules to encourage racial, ethnic, and gender diversity among license applicants.  Practically speaking, these directives will involve significant overlap since drug laws have been disproportionately applied against members of certain racial minority groups.  This recognition has encouraged many jurisdictions to target such encouragement efforts more narrowly toward individuals who are likely to have suffered damages as a result of the drug war.  Moreover, the policy of awarding licenses based on criteria other than the applicant’s ability to successfully operate a regulated business should generally not be expected to enhance social equity within the industry unless those applicants also have a thorough understanding of the legal, financial, regulatory and business environment.  We recommend efforts focusing on social equity target any favorability in licensing toward those from communities disproportionately affected by the drug war.