Analysis of New Mexico’s Cannabis Regulation Act
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Commentary

Analysis of New Mexico’s Cannabis Regulation Act

"Legalized recreational cannabis in New Mexico is inevitable," Gov. Michelle Lujan Grisham said.

The Reason Foundation has driven public policy reform at the state level for more than 50 years, including the legalization of marijuana. Reason’s “Conceptual Framework for State Efforts to Legalize and Regulate Cannabis” is meant to be a guiding document to help lawmakers and regulators in states that have or are considering legalizing marijuana for adult use.

This memorandum highlights some key innovations contained in Senate Bill 115, the Cannabis Regulation Act, considered in New Mexico earlier this year. It also highlights critical overlaps and divergences of that legislation from Reason’s conceptual framework.  The bill stalled in the State Senate this year, but it is anticipated that a version of  New Mexico’s proposal will again emerge in future legislative sessions. As Gov. Michelle Lujan Grisham said when the bill was tabled in February:

Legalized recreational cannabis in New Mexico is inevitable. The people of New Mexico have said they want it. A diversified state economy demands it. Poll after poll has demonstrated that New Mexicans want a 21st-century economy and want cannabis to be part of it: New Mexicans want more chances to stay here and build a career here; we want justice for those convicted of low-level, harmless cannabis-related offenses; we want an industry with firm and clear regulations that will keep our roads and places of business and children safe. I am disappointed but not deterred by tonight’s committee motion. The door remains open. We will keep working to get it done. And ultimately we will deliver thousands of careers for New Mexicans in a new and clean and exciting industry, a key new component of a diversifying economy. We will deliver justice to the victims of an overzealous war on low-level drugs. We will protect our medical cannabis program and the New Mexico patients who rely on it for their medicine. I will keep working hard every single day to enact and serve the will of New Mexicans – on this and every other issue.

Overview

Senate Bill 115 would legalize the possession of up to two ounces of cannabis or 16 grams of cannabis extract for adults over the age of 21.  It also sets forth the licensing structure applicable to commercial cannabis entities, provides for a new statewide excise tax on retail cannabis sales and would expunge the records of individuals who have been either arrested or convicted on charges of marijuana possession in amounts that would become legal under the bill.

Administration

Many specifics regarding the regulation of marijuana and licensing fees are left to the rulemaking process.  Because of the many technicalities involved in marijuana regulation, this deference is generally advisable although most states set the initial licensing fees in statute while allowing them to change later in response to regulatory costs.  SB 115 would consolidate all rulemaking and licensing powers into a single agency, which is a critically important decision.  States, like California and Illinois, that have divided this authority, have struggled to coordinate agency efforts.

Licensing Structure

SB 115 would create 10 different license types.  Several of these license types are novel and would be used to impose the most strenuous occupational licensing for cannabis anywhere in the world.  Apart from that, the licensing structure comports with many tenets of Reason’s conceptual framework.  There is no limit on the number of licenses that may be issued and local governments may not opt-out (an opt-out option has created massive dysfunction in California, for example).

The retail license would, with the permission of a local government, also allow on-site consumption. This is an important innovation as consumers in some states with legalized marijuana have found they have no legal place to consume as renters, tourists, or others who do not own a private residence. Likewise, Sec. 30(A) of SB 115 bans consumption in public places.

There are areas for improvement within the bill’s structure. First, SB 115 would allow the Cannabis Control Division to create subcategories of producer licenses and charge some producers higher licensing fees based purely on their gross revenues, which is effectively a penalty for those who best meet consumer demand.

Second, there is a two-year continuous residency requirement for applicants, which unnecessarily hampers the interstate movement of people and capital while limiting the growth of the industry. One key observation is that this will essentially preclude publicly-traded marijuana companies from operating in New Mexico.

Third, Sec. 8(B) requires the division to determine whether an applicant “has the financial and operational ability to engage in commercial cannabis activities.” This provision paves the way for arbitrary decision-making because these traits cannot be definitively proven. Generally, capital becomes more readily available once an applicant has received a license, for instance.

Fourth, licenses are non-transferable and there is no change of ownership allowed. This unnecessarily suppresses dynamism in the market and prevents an owner from being able to sell their own business.

Retail Excise Tax

SB 115 would impose a statewide retail excise tax of 9 percent. This would be the lowest cannabis tax in the nation. However, local governments may add an additional 8 percent in local excise taxes in increments of 1/16 of a percent. Nonetheless, we regard this tax regime as favorable for several reasons.

First, it only taxes a single time at the retail level while avoiding wholesale taxes. Wholesale taxes are less transparent to the final consumer and drastically raise the costs of compliance and administration.

Second, the rate falls within a range capable of generating additional revenue without giving black-market alternatives a significant cost advantage so that New Mexico can drive out these black markets. Reason has recommended a single retail excise tax not to exceed 15 percent.

Use of Funds

Reason Foundation recommends the revenue from marijuana taxes not be allocated toward new or ongoing programs during the first few years because of the difficulty in estimating their yield. Instead, marijuana tax revenues should initially be dedicated to paying down unfunded liabilities or to a state’s rainy day fund.

Instead, SB 115 would immediately dedicate state tax revenues in the following manner:

  • 35 percent — Community Grants Reinvestment Fund (used by nonprofits to offer job placement, housing and mental health in communities disproportionately affected by the drug war)
  • 20 percent — Low-Income Medical Patient Subsidy Fund
  • 18 percent — Health and Human Services (for use disorder treatment)
  • 6 percent — Equitable Opportunity Investment Fund
  • 5 percent — Law Enforcement
  • 5 percent — Impaired Driving Education Fund
  • 3 percent —  Cannabis Workforce Training Fund

Among these uses, the Low-Income Medical Patient Subsidy Fund stands out as a novel, but potentially dangerous use of tax revenue at this time. Due to federal law, if the state is to finance the distribution of marijuana to individuals, it could be labeled a criminal organization by the federal Justice Department and become subject to asset forfeiture along with criminal and civil penalties for its officers and employees.

Restrictions on Labor

SB 115 would create the most extensive occupational licensing requirements in the world for cannabis workers.  Sec. 12 requires all workers to acquire a “Cannabis Server Permit” through a state-licensed training system by Jan. 1, 2022, or they would be not be permitted to continue working. This places unnecessary restrictions on individuals’ ability to earn a living. Further, the state would not even begin approving training programs until six months prior, leaving a small window for workers (already employed in the industry) to obtain these permits. The permits would not be issued before Dec. 1, 2021, meaning all workers statewide would have only 30 days (during the holiday season) to apply for and be issued the permit or face the loss of their job. Once issued, this permit would be valid for three years, although there is a continuing education requirement and permit holders must pass a state-administered test prior to renewal.

Second, Sec. 8(C)(4) requires applicants for a cannabis license to submit an affidavit promising to enter a labor peace agreement with a labor union. Then, upon renewal, a representative from the labor union must sign acknowledging the labor peace agreement is in force. This attempt at forced unionization is unnecessary and violates federal labor law. The National Labor Relations Act reserves exclusive authority to regulate private-sector labor relations to the National Labor Relations Board. The U.S. Supreme Court has concluded that state and local governments have no jurisdiction to require a labor peace agreement as a condition for issuance of a business license and that any attempt to do so violates the NLRA (see Golden State Transit Corp. vs. City of Los Angeles 1987).

Restrictions on Freedom of Contract

Sec. 9 would impose certain anti-trust style restrictions on licensees that could excessively impede entrepreneurs’ ability to innovate and succeed. Sole source agreements are forbidden. Licensees cannot pay each other for distribution services (which is a common practice in many state-regulated marijuana markets) and cannot sign contracts that call for maintaining a minimum quota of inventory or mandatory re-order points. Licensees further may not engage in consignment sales of their inventory or pay finders fees to middlemen who negotiate transactions. It is unclear whether the ban on consignment sales would also preclude toll manufacturing—another common industry practice wherein a manufacturer agrees to process raw marijuana into an extract or other product for a fee without taking ownership of the inventory. All or most of Sec. 9 should be removed.

Expungements

SB 115 would effect sweeping expungement of all arrests and convictions for actions that would no longer be crimes under the bill. Expungement would be automatic, rather than forcing an individual to apply. It would also release from imprisonment individuals serving time for these actions. Reason Foundation is supportive of all these provisions and applauds SB 115 for containing some of the best expungement language seen to date in state marijuana legislation.

Geoffrey Lawrence is a senior policy fellow at Reason Foundation.