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The Strengths and Weaknesses of Connecticut’s Marijuana Legalization Law

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On June 17, Connecticut became the fifth state to legalize the adult use of marijuana through action in the state legislature. This law follows the footsteps of New Mexico, New York, New Jersey, and Virginia, which legalized recreational cannabis through legislative action earlier this year. The Connecticut marijuana legalization law was signed into law by Gov. Ned Lamont on June 22, making Connecticut the eighteenth state to create a legal, regulated cannabis market for adult use.

While the marijuana legalization effort is the be applauded, the Connecticut law has some flaws. For example, it grants unprecedented powers of market control to the agency charged with regulating the state’s legal cannabis market. The bill also includes a staggering amount of legislative deference over the regulatory structure and an unlawful requirement for labor peace agreements. Additionally, the new law would impose the highest effective marijuana tax rate in the country, making it likely that black-market marijuana products could remain highly attractive to both consumers and suppliers.  These provisions are likely to seriously hurt Connecticut’sability to create a thriving legal marijuana market.

Even so, there are several redeeming aspects of Connecticut’s effort.  Some highlights of the legalization bill include the expungement of prior marijuana-related criminal convictions that currently serve as barriers for individuals to engage in healthy and productive behaviors. The law also includes important protections for renters. 

However, the functioning of the commercial marijuana market could be hamstrung if the appointed regulator is anything less than earnest in the desire to build a competitive and flourishing industry. 

The Reason Foundation’s “Conceptual Framework for State Efforts to Legalize and Regulate Cannabis” is meant to be a guiding document to help state lawmakers and regulators in states that have or are considering legalizing marijuana for adult use.  While it’s clear Connecticut lawmakers fell short of this framework in important ways, it’s nonetheless encouraging to see any legislative body take efforts to end the counterproductive drug war, particularly when public support for such change has reached unprecedented levels.

Herein, we examine the strengths and weaknesses of the Connecticut marijuana legalization law, Senate Bill 1201: An Act Concerning Responsible and Equitable Regulation of Adult-Use Cannabis, as passed.

Strengths of Connecticut’s Marijuana Legalization Law

1. Expungement of prior convictions: Section 8 of the bill allows individuals to apply for the erasure of marijuana-related criminal convictions involving possession of fewer than four ounces beginning in July 2022.  Erasure or expungement of prior convictions is a critical component of a marijuana legalization initiative since those convictions not only impede individuals’ ability to engage in productive behaviors, but the action they were previously convicted for would now be legal.  Under the new law, courts may not charge fees for the erasure of these convictions, but applicants may need to pay legal fees to an attorney to prepare the application.  Beginning in January 2023, the erasure of prior convictions would become automatic for most individuals according to Section 9 of the law and so many would-be applicants might prefer to await this second date.  Private reporting agencies that purchase these records to provide criminal background check services in the private market will be required to update their database within 30 days to reflect these erasures, per Section 10(b).

2. Social Equity Council: Section 22 of the law establishes a Social Equity Council to review the racially disparate ways in which the drug war has been prosecuted and to provide legislative recommendations and support for eligible social equity applicants.  However, certain portions of the council’s scope could become problematic for licensees, as detailed below, and there appears to be no method of appealing the council’s decisions in these matters.

3. Business accelerator program: Together with the lead regulatory agency, the Social Equity Council is directed to create a cannabis business accelerator program in Section 38 of the law.  This is a highly valuable innovation within state cannabis programs that would reserve a portion of available licenses for social equity applicants. Reason Foundation’s preferred method for addressing social equity has been to dedicate a portion of marijuana excise taxes toward broad-based community benefit programs that would redress the impact of drug prohibition within those communities directly.  Reserving licenses specifically for social equity applicants, as Connecticut’s bill will do, fails to achieve this broad benefit by instead concentrating program benefits within the hands of a few privileged individuals.  Moreover, these individuals may not always have the expertise to acquire capital and operate a highly regulated business.  Section 38 of the law attempts to overcome a portion of these challenges by providing important mentoring and guidance to the recipients of social equity licenses.

4. Balancing employee protections and employer rights: Sections 98-99 provide reasonable protections for employers to enforce drug-free workplace rules while also disallowing a positive urine test as a sole reason for dismissal.  Employers are permitted to enforce drug-free workplace rules during work hours and to require employees to completely abstain from cannabis use in cases where federal contracts or transportation laws require them to do so.  On the other hand, Section 99 (2) (A) states, “No employer shall discharge from employment or take any adverse action against any employee with respect to compensation, terms, conditions or other privileges of employment because such employee does or does not smoke, vape, aerosolize or otherwise use cannabis products outside of the workplace.”

5. Renter protections: Some jurisdictions that have created adult-use cannabis markets have struggled to permit legal places where adults are able to consume the cannabis they have legally purchased.  In Massachusetts, for instance, an elderly couple that used cannabis for medical purposes was evicted from the apartment they had lived in for 26 years because they consumed cannabis.  Connecticut’s law bill addresses this issues head-on by providing reasonable protections to landlords who do not want their property to carry the odor of marijuana smoke while also allowing tenants to exercise their new right to purchase and consume cannabis legally.  As Sec. 90(b) states, “[I]n the case of the rental of a dwelling unit, a landlord or property manager may not prohibit the possession of cannabis or the consumption of cannabis, except a landlord or property manager may prohibit smoking of cannabis or use of an electronic cannabis device or cannabis vapor product…”

6. Stand-alone delivery license:  Not only would licensed dispensaries gain the right to make deliveries to customers at their homes (a policy which may speculatively reduce the incidence of driving under the influence), but Sec. 47 allows marijuana businesses to apply for a stand-alone delivery license in which the delivery service would drive to a dispensary to purchase marijuana products and then deliver it to the customer.  Since not all entrepreneurs are skilled at operating a storefront retail establishment, this policy allows greater flexibility and specialization within the market.

7. Possibility of future on-site consumption: Several of the most recent efforts at marijuana legalization, such as those in Michigan and New Mexico, have created a special license type to provide for marijuana consumption lounges, akin to bars, wherein patrons can legally consume marijuana.  Connecticut’s bill does not currently include this provision, but it does authorize the chief regulator to decide after January 2023 whether to allow on-site consumption lounges.

8. Intent to facilitate banking: Sec. 63 instructs the state’s banking commissioner to recommend legislation “to facilitate the use of electronic payments by cannabis establishments and consumers and regarding access for cannabis establishments to (1) depository banking, and (2) commercial mortgages.”  While this sentiment is positive, states are limited in what actions they can take to facilitate banking services within the marijuana industry since financial services are highly regulated at the federal level.  As Reason Foundation’s research has shown, the most effective step a state can take is to create a portal that facilitates data-sharing and basic “know-your-customer” information to banks so they can comply with federal anti-money laundering statutes.  Michigan has been a leader in this regard.

9. Tax credits: Sec. 133 makes investments into licensed cannabis companies eligible for the same state tax credits as investments into similarly situated companies in other industries.  While Reason does not advocate for state tax credits that could alter investment patterns that would prevail on an undistorted market, legal cannabis companies should retain equal eligibility along with similarly situated companies in other industries.

10. Evaluations of impairment: Evidence shows there is little correlation between the concentration of THC in a person’s body and their level of impairment because THC is not fully metabolized upon consumption, but can be stored in a person’s fat cells.  Nonetheless, some jurisdictions have attempted to enforce driving under the influence laws as though THC can be measured similarly to alcohol to test impairment.  Research shows that the only effective method of evaluating impairment from THC is for an individual to undergo evaluation from a trained Drug Recognition Expert.  Sections 119 and 120 of the law expressly declare this approach as the standard for testing impairment in Connecticut.  Section 18 also makes clear marijuana odor is not a primary cause for searching a motor vehicle.

Weaknesses

1. Regulatory rule-making ability: Connecticut lawmakers have not committed to making the state’s commercial cannabis market a free and open market wherein any qualified candidate can receive a license, nor have they enumerated the number of licenses available. Rather, Sec. 35 of the new law allows regulators to determine, of their own accord, how many licenses of each type they will make available. Further, Sec. 32 allows the regulator to adopt any regulations to implement the chapter and those regulations will have the force of law without the need for legislative review for four years. Generally, proposed executive branch rules must be reviewed by a legislative committee to ensure they meet lawmakers’ intent. Sec. 32 fully anticipates that this licensing structure could result in supply shortages and further imbues the chief regulator with the power to place purchase quotas on every consumer to ration supply as that regulator sees fit. Again, this command-and-control approach to the market is to be administered without the need for legislative review.

Sec. 32 further defers to regulators key elements of the marketplace, such as the rules governing packaging and labeling requirements, testing standards, and prohibiting the sale of marijuana flower that tests above 30 percent THC and concentrates that test above 60 percent THC (as most concentrates already do).

License caps in other states have invited corruption as applicants have jockeyed to secure a limited license to operate and regulators have accepted bribes from these applicants.  The most vibrant markets that offer the greatest economic opportunities to the greatest number of people are those in states that impose relatively low barriers to entry, such as in California or Colorado.  Even where license caps have been instituted, they are generally specified in statute and not left to the arbitrary whim of regulators without review.  This regulatory structure could cause Connecticut’s market to suffer dramatically.

Moreover, the law requires that half of the licenses that will be made available are specifically reserved for social equity applicants as though concentrating the benefits of marijuana legalization into a small number of hands can accomplish broad policy goals of social equity.  Since these licenses will not be awarded on the strict basis of which applicants are best positioned to operate a highly regulated business, the risk of supply shortages could be further pronounced.

2. Unlawful requirement for labor peace agreements: Section 102 of the lawrequires an applicant to enter into a labor peace agreement with union representatives as a final condition of licensure and to submit to binding arbitration with union leaders.  Federal case law has struck down similar requirements for businesses to enter a labor peace agreement as a condition of receiving a privileged business license, as witnessed in Golden State Transit Corp. v. City of Los Angeles.  Only the National Labor Relations Board has jurisdiction to regulate private-sector labor markets, according to the U.S. Supreme Court.  To be sure, other states have tried to implement similar provisions in clear defiance of federal jurisprudence, but these efforts only risk increased federal scrutiny over state-legal marijuana markets.  After the Whitmer administration proposed a similar requirement in Michigan, regulators were forced to withdraw the proposal in recognition of its unlawfulness.

3. Interference in standard business decisions: Regulators will be charged with dictating a wide array of decisions normally reserved to private businesspeople, including permissible contractual arrangements, sales quotas and production rates, the scale of operations, subletting of space, and sales promotions.  Sec. 28(a) prohibits cultivators and manufacturers of cannabis products from paying slotting fees to their retail partners to secure rights to preferred product placement, such as aisle endcaps.  These arrangements are typical in nearly all retail settings. 

Sec. 28(c) allows regulators to set per-transaction limits in response to alleged supply shortages that would be created primarily by those same regulators’ decisions to limit the number of licensees and cultivation space arbitrarily.  Sec. 37 charges commissioners with the duty to establish a maximum amount of growing space that cultivators will be permitted to operate.  At the same time, Sec. 48 establishes a minimum amount of growing space that licensed cultivators must operate at 15,000 square feet.  Sec. 58(b)(12) prohibits a licensee from subletting space so that a joint venture partner may operate under the licensee’s supervision—a common business arrangement in most states with legal commercial cannabis markets. 

Sec. 40(b) also prohibits a retailer from providing any cannabis products gratis as a component of any sales transaction. This would preclude any retailer from offering a “buy-one-get-one” sales promotion.  All these decisions should be reserved for the business owners themselves.

4. Misunderstanding of public markets:  Section 1 of the marijuana legalization law attempts to ease barriers for prospective licensees to attract capital by exempting any investor from a full background check requirement if they hold less than a five percent financial interest in the company and do not exercise controlling interest.  However, for companies held by a publicly traded entity, the licensee would be required to conduct a full background check on a person that holds more than one-half of one percent of the outstanding shares in that publicly traded entity.  This threshold is so low that hundreds of individuals could fit within the definition without any of them exercising any controlling interest.  To make matters worse, the officers in the business may have no idea who these individuals are because publicly traded shares can change hand multiple times within a single day.  This provision likely excludes any subsidiary owned by a publicly-traded company from acquiring a license in Connecticut despite the law’s apparent intent.

5. Undefined occupational licensing requirements:  Sec. 29 authorizes regulators to establish occupational licensing requirements for workers who wish to earn a living in the commercial cannabis market.  Similar requirements in other states have acted as a barrier to entry that both delays a person’s ability to earn a living and include substantial financial burdens to complete in order to gain access to a market that offers primarily entry-level positions.  While regulators may wish to ensure they exclude potential bad actors from the market by requiring background checks on workers, California has been able to do this efficiently by requiring licensees themselves to conduct the background checks and provide necessary training to their own employees.

6. Excise tax: Connecticut will adopt a unique approach to taxation by setting rates based not on a percentage of the overall transaction but on a basis of THC content per milligram.  While this approach is innovative, it could be administratively difficult for both tax collectors and taxpayers to ensure accurate compliance.  Further, the rates equate to extraordinarily high levels of taxation that will induce consumers to favor illicit suppliers.  Sec. 125 establishes the state excise tax at a rate of $0.009 per milligram of THC in raw cannabis flower.  For a flower that tests at 30 percent THC (a level not uncommon in other markets), that rate equates to $1,227 per pound of marijuana.  For reference, the pre-tax wholesale price of marijuana flowers in Washington state was quoted at $847 per pound in late 2019.  In its production-cost estimates, Reason Foundation has calculated the cost of producing marijuana on the legal market at $564 per pound on a pre-tax basis.  In other words, Connecticut’s wholesale excise tax would account for more than two-thirds of the wholesale cost of marijuana.  Sec. 126 allows municipalities to tack on an additional three percent at retail.

Without exception, the states that have been most effective at eliminating the black market for marijuana while also achieving tax revenue estimates, have been those that imposed only modest excise taxes.  Maine, Massachusetts, and Michigan all impose excise taxes near 10 percent, while Oregon imposes a total rate of 17 percent.  Connecticut’s ambitious tax plan would impose the highest effective tax rate in the country, making illicit markets highly attractive to both consumers and suppliers.  Budget analysts should take note because Connecticut will be unlikely to achieve tax revenue goals if it cannot successfully lure individuals into the legal market.

7. Use of funds: Sec. 125(i) would allocate all cannabis excise taxes to the state’s general fund during the initial years.  This allocation would progressively be diverted toward a new Social Equity Fund until a maximum of 75 percent of revenues is routed to the Social Equity Fund by 2029.  Money in the general fund can be used to support any program within the state and any program relying on these revenues would therefore become dependent on such revenues.  State revenue forecasts for cannabis excise taxes have been notoriously unreliable in other states for two reasons: (1) the data to calculate these forecasts is largely unknown and unreliable because cannabis markets have been illegal for decades; and (2) revenues are dependent on migrating both consumers and producers into the regulated, legal market.  Connecticut’s high tax rates, in particular, will likely avert many individuals from entering the legal market.  Therefore, it would be highly advisable for Connecticut to withhold cannabis excise tax revenues from the general fund until a track record could be established and instead use those revenues to pay down existing liabilities such as those found in public pension funds or to accrue them toward a state rainy day fund, as Nevada did.

Conclusion

Connecticut has made valiant strides in legalizing the adult use of marijuana, creating a legal marijuana market, and ending parts of the failed and counterproductive drug war.  However, as this analysis makes clear, much work remains to be done for Connecticut to craft a functioning commercial marijuana market.  Citizens should hope regulators are earnest and receptive to the concerns of marijuana users and commercial operators. If not, lawmakers will need to make sizable changes to the marijuana legalization legislation they’ve just enacted.

The post The Strengths and Weaknesses of Connecticut’s Marijuana Legalization Law appeared first on Reason Foundation.



Source: https://reason.org/commentary/the-strengths-and-weaknesses-of-connecticuts-marijuana-legalization-law/


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