Montana House Bill 701 of the 2021 legislative session would amend Montana Code Title 16, Chapter 12, dealing with marijuana regulation and taxation. It would modify provisions of Initiative 190, the Montana Legalization Initiative that was approved by 57 percent of the state’s voters in November 2020.
House Bill 701 would significantly restrict certain provisions of the Montana Legalization Initiative in ways that could unnecessarily slow market development and thereby dampen state revenue prospects. The bill would also reallocate excise tax revenues toward addiction recovery programs and the state’s general fund.
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 legalized, or are considering legalizing, marijuana for adult use. Using that framework, here are some of the major items of concern with the legislation:
Biggest Concerns With House Bill 701
Licensing Fees and Cultivation Tiers
House Bill 701 takes an abnormal approach to marijuana licensing fees and assigns retail dispensaries much lower licensing fees than cannabis cultivators and manufacturers. Although the state’s dispensaries would face only a modest licensing fee of $5,000 annually in Section (Sec.) 5(6), cultivators would face tiered licensing fees that range up to $27,000 annually in Sec. 4(4).
The tiered structure is provided for in the original initiative language although licensing fees are not specified in the initiative. The highest tier (level 10) allows for a maximum of 30,000 square feet of canopy space, which is regularly exceeded by licensed cultivators in other states with state-regulated marijuana markets. The Department of Revenue may create additional cultivation tiers, although other bills seeking to amend the Montana Legalization Initiative this session, such as House Bill 670, would immediately create additional tiers beyond level 10.
Section 4 also introduces a ban on outdoor cultivation even though this method consumes substantially less electricity and is less capital intensive which allows less well-capitalized entrepreneurs greater access to the market.
Typically, cultivation licenses are not more costly than dispensary licenses in state-regulated marijuana markets. Further, the ban on outdoor cultivation should be removed so long as a licensee adheres to certain safety requirements including full security fencing and video surveillance.
Limits on THC Content
Section 5(7)(c) and Sec. 45(1)(i) of HB 701 authorize the regulatory agency to promulgate rules that would limit the allowable THC content, the main psychoactive of cannabis, of marijuana products—both flower and infused products.
Limitations on the THC content of marijuana flower may not be technically feasible because it is an organic compound produced naturally by the cannabis plant that cannot be precisely programmed. Further, Section 5(8)(b) expressly permits no more than a 35 percent concentration of THC in marijuana flower. Although very few strains would exceed this threshold, it’s generally not possible for a cultivator to target precise levels of THC content.
Limiting THC content in infused marijuana products is more achievable since marijuana products typically represent a mixture of pure marijuana extract with other ingredients. Most states with adult-use marijuana markets limit the THC content in a single consumer-packaged edible product to either 100mg or 200mg of THC. HB 701 conforms in this regard by limiting edibles to 100mg of THC per package in Sec. 5(8)(b). However, the bill also limits the amount of THC in any product to 800mg, which precludes very common products, such as a 1g resin or vape cartridge, from being sold on the Montana market.
References to THC content limits not included in the original initiative language should be removed from the bill, so the state’s customers can decide which products best meet their demands.
Section 7 of HB 701 requires the Department of Revenue to issue marijuana worker permits before any person is allowed to accept employment within the legal marijuana industry. Further, subsection 3(c) allows the department to require a specific course of training before a work permit is issued.
If lawmakers’ intention is to ensure that employees of the legal marijuana industry can pass a criminal background check as a means of protecting the integrity of the legal market, this can be accomplished through less centralized means. California, for instance, requires all licensees to complete background checks on behalf of each employee and to issue identification cards to each employee which they must carry while on the job. This approach essentially offloads the burden of completing these administrative tasks from the regulator to the licensees themselves while allowing both licensees and employees to operate more nimbly in a dynamic labor market.
Other states, like Nevada, that have insisted on state-issued occupational licenses for marijuana workers have experienced massive delays as a backlog of applications materialized and overwhelmed regulators while also distracting those regulators from more direct oversight of operations. Likewise, individuals seeking a remunerative position in the industry may experience months-long delays before they are able to realize a paycheck. The provisions of Sec. 7 should be removed or the onus of completing these administrative functions should be shifted to the licensees themselves.
Disclosure of Licensee Information
Section 37(10) of HB 701 requires the Department of Taxation to provide the “names and phone numbers of persons licensed under this chapter…on the department’s website.” Although the provision protects the physical location of licensees’ personal addresses and licensed premises’ addresses from public view, this information may still represent a security threat to licensees because of the cash-intensive nature of the business. Montana should refrain from making public any personal information about licensees.
Removal of Protections for Occupational License Holders
Section 39 removes existing protections for a holder of a professional or occupational license issued in Montana who provides services to a licensed marijuana business. This includes lawyers and accountants on whose services most marijuana businesses will be dependent. Nearly all existing state marijuana legalization statutes include this protection. Section 39 expressly maintains protections for parental rights and organ transplants for legal marijuana consumers. The protection for occupational license holders should be retained.
Section 52(8) would require licensees to gain express approval from the department with regard to every package and label on each product before that product can be offered for sale on the legal market. This level of administrative micromanagement could cause prolonged delays before any licensee is able to offer a new product for sale while the department evaluates minor (and perhaps arbitrary) details such as font and font size. Most states with legal marijuana markets give clear direction for what statements or disclosures are required to appear on labels and what claims or images are prohibited, freeing regulators to pursue blatant violations rather than spending time on pre-approval of every product’s packaging. Montana should follow suit.
“Unduly Burdensome” Ordinances by Local Governments
Section 56(2) would remove from existing law a requirement that “A local government may not adopt ordinances or regulations that are unduly burdensome” for licensed marijuana businesses. Section 52 already proposes to give counties and municipalities the ability to ban certain or all license types from operating within their jurisdiction. If a county or municipality votes to permit the operation of licensed marijuana businesses, it should be enjoined from proposing “unduly burdensome” regulations against those businesses.
Diversion of Marijuana Excise Tax Revenue
Section 44 of House Bill 701 would divert marijuana excise tax revenue from the beneficiary parties specified in the Montana Legalization Initiative, including an array of wildlife and conservation programs. In place of these recipients, the 20 percent retail excise tax would be used first to pay for the costs of regulating the industry through a special revenue account which must always retain three months operating expense. At the end of the fiscal year, any amounts in excess of this level would be transferred, with the first $6 million going to an addiction recovery program, $150,000 to the Board of Crime Control, $300,000 for the training of law enforcement canines, and 88 percent of any remainder going to the state’s general fund and 12 percent going toward state parks and recreational facilities.
The large increase in allocation going toward the general fund indicates marijuana excise tax revenue will become available to finance new, ongoing programs despite the uncertainty of future revenue levels.
Reason Foundation strongly advises states implementing a regulated marijuana market to set aside excise tax revenues in the first few years by depositing them into a rainy day account or using them to pay down long-term liabilities, such as those found within public pension systems (as HB 670 proposes to do).
States have been notoriously inaccurate in their forecasting of revenues from legalized marijuana because the data needed to model marijuana markets are limited and because it takes time for states to properly license marijuana businesses and for those businesses to then begin remitting tax returns. Expenditures for unrelated, ongoing state programs should not be funded by uncertain revenue streams, like marijuana excise taxes, at least until a reliable track record has been established.
While the Montana Legalization Initiative, like many initial attempts at marijuana legalization, is imperfect, the so-called “clean up” legislation currently moving through the Montana legislature would lead to a less orderly marketplace by foisting a more intrusive role for regulators. Regulators in other states that have adopted a similar scope of action, such as Nevada, have struggled to execute these functions on a timely basis. Some of the provisions of HB 701, such as allowing regulatory limits on the amount of THC content in licensed marijuana flower, may also be technically infeasible. Removing protections for lawyers or accountants who work with the industry threatens overall compliance when regulated marijuana markets should be trying to foster the highest level of compliance possible.
Overall, HB 701 would introduce a series of policies that could be damaging to the health and safety of the marketplace, although more modest proposals, such as HB 670 would make only modest changes for the responsible use of marijuana excise taxes. Montana lawmakers should favor that approach.