The Strengths and Flaws in Minnesota’s Marijuana Legalization Bill
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Commentary

The Strengths and Flaws in Minnesota’s Marijuana Legalization Bill

The bill, H.F. 4632, would legalize recreational marijuana use by adults and set rules for a legal cannabis industry in the state.

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 identifying best practices 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 Minnesota’s H.F. 4632, the cannabis legalization act now under consideration in the state legislature, and highlights critical overlaps and divergences of that legislation from Reason’s conceptual framework.

Overview

H.F. 4632 would legalize the possession of up to 1.5 ounces of cannabis for adults over age 21 to carry on their person and possession of up to 10 pounds in a private residence.  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.  H.F. 4632 would consolidate all rulemaking and licensing powers into a Cannabis Management Board.  Consolidating the regulatory functions into a single agency is a critically important decision because states, like California and Illinois, that have divided this authority have struggled to coordinate agency efforts.  However, states that have relied on boards of political appointees to regulate cannabis have experienced significant delays due to the infrequency of board meetings, allegations of favoritism, and even instances of outright corruption.  Reason Foundation advises that cannabis be regulated through a single agency comprised primarily of civil servants adhering closely to prescribed rules.  After Michigan, for instance, eliminated its governing board and consolidated regulatory powers within the newly created Marijuana Regulatory Agency, the new agency doubled the speed with which licensed applications had been processed.  The change also allowed the administration to move beyond stories of corruption that had plagued the previous board.

Licensing Structure

H.F. 4632 would create 10 different license types.  Several of these license types are novel while others replicate some of the better licensing innovations created by states with adult-use marijuana programs.  Marijuana licenses would be issued for the typical categories of cultivators, manufacturers, retailers, transporters, testing labs and microbusinesses.  Additional license types include wholesaler, event organizer, delivery service, and medical cannabis business (H.F. 4632 would also consolidate the state’s medical marijuana program with its new, adult-use program).  The event organizer license removes uncertainty faced by event promoters and licensed businesses that wish to participate in marijuana-themed events.  The other additional license types, however, are of questionable value.  Typically, licensed cannabis cultivators and manufacturers can sell directly to each other on a wholesale basis as well as to dispensaries, so the wholesale license type would be unnecessary.  If cultivators and manufacturers will be required to procure a wholesale license to perform these transactions in Minnesota, then the additional license would only represent another barrier to the legal marijuana market.

Likewise, retail marijuana delivery services are typically permitted as a component of a retail license—without the need to acquire a separate license type.  If the motivation is to enable delivery-only business models, such as Eaze, and retail licensees are permitted to conduct deliveries themselves under a retail license, then this concern may be abated.  Further, the requirements for a licensed delivery service to register every vehicle it uses with the board (Art. 1 Sec. 35) would make it difficult for legal marijuana delivery companies to allow their employees to use their own vehicles—the way most pizza delivery drivers do, for example—and could add substantially to the costs of operation by requiring licensees to maintain an internal fleet of vehicles.

The microbusiness license would, with permission of a local government, also allow on-site consumption of edible cannabis products.  Microbusinesses would be able to cultivate up to 2,000 square feet of canopy space and offer live entertainment.  However, microbusinesses would not be permitted to sell alcohol, tobacco, or non-infused foods or drinks (Art. 1 Sec. 32).  On-site consumption through any method other than edible marijuana products is prohibited.  Due to the onset time of edible consumption, which can take up to two hours, offering a public consumption space under these limitations may not be a viable business model.  Further, a prohibition on the sale of non-infused food or beverage products may endanger public safety.  If consumers are to remain on-premises long enough to experience the onset of an edible marijuana product, they may become dehydrated or otherwise have a legitimate need to purchase non-infused food or beverage products.  Although regulators may have legitimate concerns about a microbusiness’s ability to satisfy health code requirements for making non-infused food products, there is little reason to prohibit the sale of prepackaged food and beverage items.

Under H.F. 4632 local governments would not be able to opt-out.  Local government opt-outs have created massive dysfunction in the California market where nearly 80 percent of municipalities forbid retail sales, and so this provision should be applauded.

Issuance of Licenses

Applicants for a marijuana license must have possession of the property where the license will be located prior to applying (Art. 1 Sec. 13).  This requirement dramatically increases the risk that prospective licensees must assume because they would need to enter long-term lease or purchase agreements on facilities with no guarantee that they will be able to deploy those assets as a licensed business.  This risk makes it difficult to raise capital since the capital needed to finance property acquisition usually follows receipt of the license.  Other states have allowed applicants to apply for a provisional license that grants a period of time for the applicant to find a suitable location and satisfy local governments’ licensing requirements whereupon the provisional license is converted into a permanent license.  Nevada’s provisions are particularly good in this regard, for example, and should be viewed as a model.

H.F. 4632 does not technically impose an artificial limit on the number of marijuana licenses available for issuance.  However, it does charge the board with the obligation to determine market demand and to “issue the necessary number of licenses…to assure sufficient supply of cannabis products” (Art. 1 Sec. 14).  Public agencies are poorly positioned to coordinate supply and demand.  Previous attempts by public agencies in other states that tried to estimate the demand for legal marijuana products have proven radically inaccurate. Public agencies cannot properly anticipate shifts in consumer demand nor the efficiency with which various producers will operate.  The best regulator of supply is natural consumer demand—there is no limit to the number of permissible grocery stores, for instance, but the signals sent by consumers tell grocers how many stores to build.  The state needn’t intervene in these decisions and attempts to do so invite corruption and cronyism, as applicants vie for the limited number of licenses available.

Given this soft cap on the number of licenses available, Art. 1 Sec. 14 also prescribes selection criteria for rationing those licenses.  The criteria create a preference for so-called “craft cultivators” and microbusinesses over bulk cultivators.  Art. 1 Sec. 19 clarifies that a craft cultivator is allowed up to 10,000 square feet of canopy space while bulk cultivators are allowed up to 30,000 square feet.  Art. 1 Sec. 20 also permits both indoor and outdoor cultivation, which expands upon the allowable business models for cultivators.  The board is instructed to award no bulk cultivator licenses prior to July 1, 2026, unless it determines craft cultivators and microbusinesses cannot produce sufficient supply.  In general, the production cost per pound is lower at a larger scale, so these restrictions will likely result in consumers facing higher prices on the legal market.

One highlight of the marijuana licensing process outlined in H.F. 4632 is the absence of large fees that can serve as a significant barrier to entry to the market for many prospective licensees.  H.F. 4632 would only charge applicants a nonrefundable application fee of $250 (Art. 1 Sec. 13 Sub. 3) and no other licensing fees (Art. 1 Sec. 10).  These provisions would make Minnesota the national leader in terms of removing financial barriers to legal marijuana market entry.

Ownership Restrictions

Sec. 17 Sub. 2 Sec. 4-6 of the bill requires a minimum of 75 percent of the ownership of licensed businesses to be held by Minnesota residents while licensed individuals must reside in the state.  Further, Art. 1 Sect. 13 requires periodic reporting on the ownership of any parent companies.  Taken together, these provisions likely make it impossible for any publicly-traded marijuana company to invest in the state’s cannabis industry since they will neither meet residency requirements nor have timely access to the information necessary to meet the ownership reporting requirements.  Since marijuana businesses are systematically excluded from access to traditional capital sources like bank loans, equity markets have been the primary source of capitalization.  Requirements that effectively exclude public companies, therefore, would deprive the state of a key source of capital for marijuana ventures.

Further, residency requirements for ownership may violate the so-called Dormant Commerce Clause to the U.S. Constitution by creating state-imposed limits on interstate commerce.  Although some of the earliest states to create adult-use marijuana programs, like Colorado, imposed similar requirements, most have been relaxed.  Residency requirements likely would not withstand a challenge in federal court.

Retail Excise Tax

Art. 2 Sec. 4 imposes a retail excise tax of 10 percent on sales.  This would be among the most favorable tax treatments for cannabis in the U.S., alongside Maine and Michigan.  An oddity within H.F. 4632, however, is that proceeds from this excise tax would be deposited into the state general fund and regulatory agencies would rely on regular appropriations for funding.  Typically, the proceeds of marijuana excise taxes are deposited into a special revenue fund with the first portion of revenues dedicated to paying for the costs of regulation.  If Minnesota opts to route its marijuana tax proceeds to the general fund, its legislature might debate the merits of adult-use marijuana prior to every budget cycle.

Social Impact Programs

H.F. 4632 would create a range of social impact programs, although it appears funding for these programs would be subject to the regular appropriations process and derive from the general fund.  In particular, Art. 4 establishes CanGrow, CanStartup, CanNavigate and CanTrain.  These programs would provide grant funding to nonprofits and other organizations that provide job training, legal services, or even debt financing at low rates and with possible forgiveness to marijuana applicants and licensees.

In addition, Art. 1 Sec. 14 creates a preference in licensing for qualified social equity applicants.  Art. 1 Sec. 55 defines social equity applicants as 1) military veterans who were dishonorably discharged due to a cannabis-related offense; or 2) continuous residents for the past five years in a Census Tract where the poverty rate was greater than 20 percent or where the median family income did not exceed 80 percent of the median family income in the respective metropolitan area.  The CanStartup program also targets revolving loan funds toward social equity applicants.  A possible improvement might be to make all veterans eligible rather than only those who were dishonorably discharged for a cannabis offense since that is an atypically narrow provision.

Art. 1 Sec. 56 also directs the board to create a CanRenew program that makes grants to community organizations that propose to make investments within communities where individuals would be eligible social equity applicants.  This section is widely open-ended and contains no limiting language for the types of social impacts the board should seek to achieve.  This section might be strengthened by enumerating specific goals, such as job training or violence prevention.

Approval of Individual Products

Art. 1 Sec. 6 requires the board to give prior approval for every cannabis product that is available for sale.  Given the infrequency of board meetings juxtaposed against the natural innovation of the marijuana market and continuously shifting consumer demand, this provision could unnecessarily slow the legal marijuana market’s development.  It would be preferable to outline the types of products that would not be permitted and allow the development of alternative products so long as they meet relevant testing and safety standards.

Restrictions on Labor

Art. 1 Sec. 13 requires applicants for a cannabis license to submit an attestation from a bona fide labor organization that the applicant has entered into a labor peace agreement. Applicants may need to enter this agreement even before they hire any employees. This requirement 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).

Although other states have proposed similar measures, these requirements are likely to be overturned on a challenge and only invite increased federal scrutiny over state marijuana programs.  California requires a licensee to submit an affidavit affirming the intent to enter a labor peace agreement once the licensee has more than 20 employees, but neither the actual agreement nor an attestation from a labor union is ever required.  Thus, this requirement is not as direct and not as ripe for a legal challenge unless and until the California Bureau of Cannabis Control actually requires a licensee to enter a labor peace agreement or forfeit their license.  Michigan proposed requiring a labor peace agreement as a condition of licensure through proposed rules in 2019, but retracted the proposal after receiving testimony from the Reason Foundation on case law related to these provisions.

Restrictions on Production Methods

H.F. 4632 would impose costly restrictions on allowable marijuana production methods that would elevate the prices of cannabis on the legal market and potentially avert consumers’ transition away from already established but illicit supply channels.  Namely, Art. 1 Sec. 7 instructs the board to establish requirements for licensed cultivators and manufacturers to procure their electricity specifically from solar or wind sources that may not be readily available.  If no method for purchasing electricity from these sources is available, then licensees would be required to purchase “approved credits to offset the use of other energy sources.”  It’s not evident from the statutory language that the use of sunlight in an outdoor or greenhouse cultivation setting would be sufficient to meet these requirements.

Further, the board is instructed to require the reuse of wastewater and to “promote the use of electric vehicles throughout the cannabis industry.”  In particular, Art. 1 Sec. 28 Sub. 1 prohibits the use of any vehicle that is not fully electric for retail deliveries.  These requirements could make it noneconomical to operate a legal cannabis business when illicit suppliers face no such constraints.  If Minnesota seeks to require the use of fully electric vehicles and specific electricity sources, this debate should be held separate and apart from cannabis legalization.  Among other aspects, conflating these two controversial issues within a single bill may imperil its passage.

Expungements

Article 6 would effect sweeping expungement of all non-felony cannabis charges or convictions. Expungement would be automatic, rather than forcing an individual to apply. It would also release from imprisonment the individuals who are serving time for these actions. Felony cannabis charges or convictions would become subject to review by a new Cannabis Expungement Board.  These provisions would combine to give Minnesota some of the best expungement language seen to date in marijuana legalization bills.

Geoffrey Lawrence is a senior policy fellow at Reason Foundation.