Washington may soon become the third state to adopt legislation authorizing cross-border cannabis sales. In March, the State Senate overwhelmingly approved legislation that would allow Washington’s governor to enter interstate commerce agreements with other states where marijuana is legal, such as Oregon and California. Those two states enacted similar legislation in 2019 and 2022, respectively.
Such agreements would allow local growers and producers of cannabis to do business with cannabis companies and consumers in other states. Consumers would see more variety and better prices, and in-state cannabis operators would gain flexibility in getting products to where they are most in demand.
Cannabis businesses, particularly those with fewer financial resources, would be better fortified against unexpected changes in market or regulatory conditions, consumer demand, and even seasonal variation. It would also be a big step in addressing gray markets and interstate smuggling of regulated inventory.
Consider New York, where cannabis has been legalized for adult use, and the state now has 66 licensed retailers. But, that number is far too small to meet consumer demands. As a result, officials estimate that there remain around 1,400 unlicensed cannabis sellers in the state, with much of the product they sell originating in California.
Meanwhile, in California, illicit suppliers of cannabis continue to dominate the market, capturing 55 to 90 percent of marijuana sales depending on whose estimate you choose. The size of the illicit market is due largely to costly tax and regulatory requirements that make the price of legal cannabis products too high for many consumers. So, consumers continue to buy marijuana from the black market.
Clearly, there is demand for California cannabis products outside of California, and legal producers would certainly like to meet that demand, particularly if out-of-state consumers are willing to pay prices Californians are not. This would benefit both California producers and officials in other states, like New York, as they try to control the proliferation of counterfeit and potentially risky black market products packaged to look like genuine California cannabis.
Cannabis businesses also face supply risks that legal interstate commerce can help resolve. For example, farmers in New York planted their crops with the expectation that the state’s legal cannabis market would be open for business in 2022. But then the state took longer than anticipated to actually issue dispensary licenses. As a result, growers produced hundreds of thousands of pounds of cannabis they could not sell. The product piled up in warehouses and left growers scrambling to figure out how to safely store it indefinitely.
Some of this situation in New York is almost certainly the temporary growing pains of a nascent market, and, as more retail dispensaries open in that state, the interest in bootlegged cannabis from California may decrease. However, it’s normal for unexpected shifts in consumer supply and demand to occasionally leave producers with a deficit or surplus of goods. In any other industry, these surprises may be reconciled by purchasing additional supplies from another state or by shipping their own surpluses to other states with greater demand. Cannabis businesses currently do not have that option, limited to operating wholly within the silo of their home states.
This barrier has not stopped the diversion of legal products into states where they cannot be legally sold. ‘Gray market’ goods leave consumers with questions about the quality of what they’re purchasing and impact local legally operating businesses competing for customers. Such markets also provide cover for products designed and packaged to appear as if they are legitimate when they are counterfeit products of unknown origin and safety.
This is all a byproduct of the longstanding détente between state and federal authorities over the legality of state-legalized cannabis. Since 2014, federal lawmakers and law enforcement have generally taken a position of non-interference, leaving states to make their own decisions so long as cannabis activity remains within their borders.
Even if Washington and other states sign an interstate compact authorizing a multi-state market, it can only go into effect after one of three things happens:
- The U.S. Department of Justice (DOJ) can issue an opinion stating that it will allow interstate transfers of cannabis between states where it is legal;
- Congress votes on and ratifies the interstate compact; or
- Congress removes or directs the Drug Enforcement Administration to remove cannabis from the Controlled Substances Act, ending federal prohibition entirely and allowing for interstate commerce.
As Reason Foundation’s Geoffrey Lawrence wrote last year, the first option is plausible. Since 2014, Congress has attached riders to congressional appropriations bills that prevent the DOJ from using any funds to prosecute businesses or individuals for cannabis crimes when those crimes are not in violation of any state law. In the event that Washington enacts market-sharing agreements, licensees would remain in good standing with state law even if they sell into another state that is a party to the agreement. Moreover, U.S. Supreme Court rulings have held that wholly intrastate commerce is already within the purview of federal regulation just as much as interstate commerce. The DOJ may simply conclude that interstate commerce does not give it any additional authority to use its resources or powers to interfere.
As Lawrence notes, the cleaner approach would be for Congress to enact legislation expressly approving such interstate commerce through a comprehensive reformation of federal drug laws. Proposals like the States Reform Act, introduced last year by Rep. Nancy Mace (R-SC), would allow states to dictate their own rules on intrastate commerce while facilitating interstate commerce through the U.S. Treasury Department. That agency would oversee such transfers to ensure an orderly and safe national market and work with the Justice Department to police criminal activity.
Nearly half of the American population currently lives in a state where recreational cannabis is legal for adults. To varying degrees, the state-based legalization model has served nascent local markets well. But balkanization also creates market inefficiencies as goods and resources cannot freely flow to the places where they are most needed, resulting in fewer choices and higher prices for consumers. Meanwhile, illicit competitors face no such restrictions.
Congress should act quickly to implement some form of interstate cannabis system, and states’ burgeoning demand for an interstate compact may prove to be an important catalyst. Other states with legal marijuana markets should follow the leads of California, Oregon, and Washington to maintain this pressure.