It’s well-documented that California’s legal marijuana marketplace is rife with problems due, in part, to onerous red tape and high taxes that allow the black market to continue to dominate. As a result, California is again looking to overhaul its regulatory framework for legal marijuana and medical cannabis.
The Department of Cannabis Control, created last year as a result of a previous regulatory overhaul that consolidated the efforts of three different agencies, has proposed new rules to govern the legal marijuana market. Unfortunately, many of the changes would further complicate the state’s legal marijuana market rather than improve its functioning.
In 2019, the Legislative Analyst’s Office found California’s marijuana taxes were too high and its taxing mechanisms too inefficient for licensed cannabis companies to successfully compete with the illicit marijuana market. Thus, even as the marijuana industry thrives in most other parts of the country, a coalition of licensed marijuana businesses recently complained that the entire industry in California is collapsing.
“The California cannabis system is a nation-wide mockery; a public policy lesson in what not to do,” the coalition’s letter said. “Unable to thrive in California’s broken system, many of us are now facing the imminent loss of our businesses and ability to provide for our families.”
Among the positive changes being proposed by the Department of Cannabis Control, one rule would ease ownership reporting requirements by clarifying that passive investors with less than 10% ownership in a licensed business would no longer be considered financial interest holders responsible for providing extensive reporting and background checks to the state as a condition of licensure for the business.
Another positive change is the proposal to allow the curbside delivery of marijuana products by retailers, which would expand the convenience of purchasing from legal stores and allow licensed distributors to use transport vehicles that they don’t fully own.
Unfortunately, however, a majority of the proposed changes would make it even more costly and burdensome for cannabis industry businesses to operate in the state’s legal marijuana market. For instance, the Department of Cannabis Control is considering banning the use of shipping containers and modular buildings on the premises of legal marijuana licensees, which would require many marijuana companies to build costly, permanent structures.
Existing licensees are offered only a six-month grace period to erect these permanent structures and come into compliance with the new rules, further raising the cost of compliance and making it harder to compete with marijuana prices on the black market.
The Department of Cannabis Control’s rules would also reimpose a controversial requirement that applicants for legal marijuana business licenses with over 20 employees will submit a signature page saying they will enter into a labor peace agreement with labor unions. This requirement is constitutionally suspect because federal law and U.S. Supreme Court decisions clearly reserve to the National Labor Relations Board the sole authority to impose these kinds of requirements on private employers. But now, the state’s new draft regulations would go even further by extending this requirement even to marijuana business licensees with fewer than 20 employees.
On the whole, the proposed changes to the state’s marijuana regulations would do little to improve California’s dysfunctional legal cannabis market. At some point, it is incumbent on state lawmakers and Gov. Gavin Newsom to change the authorizing statutes so legal marijuana industry operators can compete with the thriving black market for marijuana products.
Chiefly, lawmakers should do what they can to reduce and simplify cannabis taxes by removing all wholesale taxes and charging only a modest retail excise tax.
Beyond that, lawmakers should consider incentives such as revenue-sharing to induce more jurisdictions to authorize legal cannabis sales so consumers gain access to legal products within reasonable distances from their homes.
The legal marijuana market should be booming in California, but even the latest good-faith efforts by the Department of Cannabis Control seem more likely to increase regulatory burdens than save California’s experience with legal cannabis.
A version of this column first appeared in the Orange County Register.