North Carolina House Bill 617 would legalize the possession of up to two ounces of marijuana by adults aged 21 and older and would authorize the regulation of a commercial marijuana market.
The North Carolina Department of Public Safety would assume responsibility for this regulation and the legislation would require the department to adopt rules for the commercial market within six months of the bill’s effective date. House Bill 617 is lacking some important details and leaves many provisions to the rulemaking process, where regulators will be able to more quickly make adjustments as required.
This analysis highlights the relative strengths and weaknesses of North Carolina House Bill 617 as compared to other states’ legal marijuana markets and Reason Foundation’s “Conceptual Framework for State Efforts to Legalize and Regulate Marijuana.”
The positive aspects of HB 617 include the automatic expungement of prior criminal records and the provisions that allow cannabis delivery services and on-site consumption, both of which would help consumers and the success of the legal marijuana market in general.
But, unfortunately, the high tax rate included in the bill may raise the cost of legal marijuana to a level where the black market is seen as more attractive to buyers. The bill’s lack of an appeal process for denied license applications, among other elements, should also be improved.
Strengths of House Bill 617
Limiting Barriers to Entry
House Bill 617 contains several provisions expressly intended to minimize barriers to entry into the regulated marketplace for license applicants. Section 18D-202(5), for instance, instructs the proposed Office of Social Equity within the Department of Public Safety to advise the department “against implementing regulations and financial requirements that unnecessarily impose financial burdens that undermine the purposes of this Chapter.”
Meanwhile. Section 18D-415(a) states department rules “shall not…require such a high investment of risk, money, time, or any other resource or asset that the operation of a cannabis establishment is not worthy of being carried out in practice by a reasonably prudent businessperson.”
The legislation also caps application fees at $5,000 and expressly allows for outdoor cultivation facilities, which require only modest amounts of capital to construct.
These provisions would ensure North Carolina’s regulated marijuana market could be competitive and accessible to entrepreneurs without large capital endowments.
No Statewide Cap on Legal Marijuana Licenses
HB 617 establishes no arbitrary cap on the number of legal marijuana licenses that would be permitted statewide. This is beneficial because other states’ experiences have shown the best approach to awarding marijuana licenses is to allow the basic market forces of supply and demand to prevail.
Unfortunately, Section 18D-301(b) unwisely allows local governments to limit licenses.
Automatic Expungement of Past Marijuana Convictions
Section 15A-145.8B requires North Carolina courts to automatically expunge prior convictions for offenses that would be legal if HB 617 became law.
Expungement of these records is an important component of justice— considering individuals would be free to engage in certain actions today for which other individuals carry past criminal records. And those criminal records often limit individuals’ ability to engage in socially productive activities, such as pursuing higher education or applying for a job or business loan.
Delivery and On-Site Marijuana Consumption
Some other state marijuana legalization statutes suffer a major shortcoming because tourists, convention-goers, and other visitors have no place to legally consume marijuana products they can legally purchase. Providing for consumption on-site of a licensed cannabis facility, with remediation controls for odor and other possible irritants, allows travelers and others to safely and legally consume marijuana.
Similarly, delivery services allow for residents who do not live within a reasonable distance of a licensed dispensary to access regulated marijuana on the legal market. The authors of House Bill 617 should be applauded for these provisions in sections18D-301(a) and 18-415(a)(9), respectively.
Two-Step Approval for Marijuana Licensees
Section 18D-300(f) sets forth a two-step approval process for license applicants in which an applicant can receive a provisional license before securing a physical address to which the license would be affixed. Upon securing a physical address, the provisional licensee can complete the licensing process and submit it to an inspection by the department. This provision is incredibly important because it alleviates the applicant of the need to risk large sums of capital by purchasing or leasing a facility with no certainty that the applicant will actually secure a license.
Section 18D-300 also includes no capitalization requirements for applicants and clarifies that the department “shall issue” a license if the applicant meets the requirements for licensure. These provisions appear to recognize the fact that capital tends to flow toward licensees after they have received a license to operate in the legal marijuana industry and that the holders of capital are unlikely to risk that capital for highly uncertain ventures.
Weaknesses of House Bill 617
High Tax Rate on Legal Marijuana
Section 18D-501(a) would impose a 30 percent excise tax on commercial marijuana sales at retail. Additionally, Section 18D-502(a) would authorize municipalities to enact an additional retail excise tax of 2 percent.
Although this structure conforms to Reason Foundation’s recommendations to levy excise taxes at retail only, Reason recommends a retail excise tax not to exceed 15 percent. Several regulated marijuana markets meet this threshold, including those in Maine, Massachusetts, and Michigan. Oregon falls slightly above that threshold with a retail excise tax rate of 17 percent. House Bill 617 would result in North Carolina having a high, 30-to-32 percent excise tax that may make legal marijuana uncompetitive on a price basis with black-market alternatives for which supply chains are already established.
Empirical research shows cannabis consumers exhibit a proclivity to substitute illegal marijuana for legal marijuana when the prices between the two otherwise similar goods diverge sharply. This can result in a continuation of the black market and failure of states to realize anticipated tax revenues from legal marijuana.
Local Opt-Outs and License Caps
Section 18D-301(b) would allow local governments to either prohibit marijuana establishments within their own borders completely or to arbitrarily limit the number of licenses available within their jurisdictions. Local government opt-outs in California have substantially limited the access of many citizens to legal marijuana products within a reasonable distance of their homes. In fact, 75 percent of California’s local governments have prohibited retail cannabis establishments, which has allowed the black market to thrive in areas of California without available retail establishments and limited the state’s ability to realize tax revenue.
Similarly, arbitrary caps on the number of licenses have invited corruption among public officials as applicants strive to obtain one of these limited licenses. Nevada is a prime example where state regulators were caught accepting bribes from applicants and changing the application process to benefit those applicants. Just as with laundromats and grocery stores, the best regulator of supply for the commercial marijuana industry is consumer demand.
Drug-Free Workplace Rules
House Bill 617’s Section 18D-408(a) would provide legal marijuana consumers protection from “disciplinary action by a business.” This provision includes no caveats for businesses that implement a “drug-free workplace” rule or similar employment policies, as is standard in most state legalization statutes. Private businesses should retain the ability to adhere to uniform standards for drug use, provided they are implemented without discrimination and relevant to the needs of the business, including for businesses that hold federal contracts.
General Fund Allocation
Section 18D-503 would immediately allocate 50 percent of the excise tax revenues resulting from legal marijuana sales to the state’s general fund, where the state could then use the money for any purpose, including the creation of new state government programs.
Reason Foundation has urged that state governments take extreme caution in allocating marijuana excise tax revenues toward new programs, especially during the first years of a new legal marijuana market. Until a track record has been established from which to more accurately forecast legal marijuana revenues, states should resist the urge to create new programs. California, for instance, realized only one-third of its forecasted tax revenues from marijuana excise taxes. Nevada underestimated its legal revenues prior to the launch of the commercial market. The data for creating these forecasts prior to legalization is generally unavailable and highly speculative. Reason recommends that initial tax revenues from legal marijuana sales be allocated to a state’s rainy day fund or to pay down long-term liabilities, such as those found within public pension systems.
Lack of Appeal for Denied Applications
Section 18D-300 outlines the application process to acquire a cannabis establishment license. Subsection (g) provides for no process to appeal a rejection or cure deficiencies in an application, which are common provisions in most legalization statutes.
Conclusion
Overall, House Bill 617’s establishment of a legal cannabis market in North Carolina would be positive for the state’s economy, criminal justice reforms, and cannabis consumers. With a few adjustments, the legalization effort could lead to a fair and thriving marijuana market.