The federal flaws

by DGO Staff

Is a mass-scale federal legalization really the best plan for Colorado’s cannabis industry?

SPECIAL TO DGO
Cannabis’s popularity is currently at an all-time high. About 58% of Americans think it should be legalized, and more people than ever are admitting to smoking the good old herb. Plus, cannabis is now legal at the state level in more places than ever.

The states where the cannabis industry is legal are now thriving, with many of them recording at or near-record sales — as well as record amounts of taxes pulled from these sales for programs across the state.

That’s all well and good, but what happens if the current push to federally legalize is successful? What impact does it have on the state of Colorado, and the other states where cannabis is now fully legal?

The threat of federal legalization of cannabis has been on the minds of growers for years, but even with a Congress that is majority Democrat, legalization on the federal level has still yet to see the light of day. Winning this battle still seems far off from reality, but the potential consequences of legalizing on a federal level still loom in the heads of growers and business owners across legal states.

The Walmartization of cannabis

One of the big fears with federal legislation is the smaller businesses getting run over the same way Walmart has destroyed countless businesses around the country. Federal legislation can open the door to mega-corporations entering the cannabis business, and with the huge cash reserves these businesses have, it can be done on such a large scale that smaller ones simply won’t be able to compete.

A fear that many growers have with federal legalization is how it could immediately expose every existing market in the country to a flood of national competitors. This means the smaller growers are going to struggle with trying to compete since the big competition will be able to ship their product across the country and undercut the local prices.

States that have a tight grasp on the price of medical marijuana will be forced to compete with out of state companies, which could, in turn, cause the price of cannabis to fall drastically. States like Colorado and Washington could see major companies set up shop in the state and force the smaller companies out of business.

States that a newer to the legal cannabis game would also take a big hit. Businesses in these states haven’t had the opportunity to establish themselves in the market like Colorado or Washington have. As such, it could essentially wipe out the new growers and their businesses by crashing the market prices.

Large scale growers would likely head to states where they can get away with looser labor laws, looser energy and environmental standards to maximize profits. These kinds of states will typically have lower taxes, lower fees and more lax regulations placed on them, which allows them to cultivate very large harvests for minimal cost. In turn, these large growers will export their cheaply grown cannabis all over the country where the price will be drastically lower than local growers.

As such, many cannabis business owners fear that lifting all federal regulations on cannabis at one time will essentially create a tidal wave of smaller businesses succumbing to the pressures from the new competition. And, what’s perhaps more concerning is that these large potential operators could lead to the destruction of other important programs, like Colorado’s social equity cannabis programs, which have been vital in helping foster more minority-owned cannabis businesses.

Federal bills or busts

And, if that all sounds like a scare tactic, it’s not. While weed isn’t federally legal yet, Senator Chuck Schumer recently produced a draft bill decriminalizing marijuana that would regulate a nationwide industry and force state markets to interact with each other.

This would be a good thing in ways, as it would open up a multitude of new opportunities for growers. It would also make traditional banking resources accessible to the industry, allow credit card sales, and make it possible for cannabis companies to be listed on the New York Stock Exchange.

Another major benefit would be the ability for cannabis businesses to gain access to loans, which are currently inaccessible to the cannabis industry. With more access to funding, existing cannabis businesses could grow and get to the net level.

But one of the major problems with Schumer’s bill is that it doesn’t give the states the authority they need to keep their markets intact. While the bill would make it easier to bank and access funding, this bill would also essentially eliminate the staunch state borders that currently guard each state’s cannabis industry. That again could have devastating effects on the industry, both in Colorado and otherwise.

Big downsides to fed legalization

While federal regulations would benefit the consumer, it could spell disaster for the proprietor. Federal regulations would allow businesses to have a larger selection, including products from out of state, but at a lower price due to the supply being greater. But, the current proposed federal tax structures are extremely high — and most small businesses would not be able to pay long term.

One major but potential downside of federal legalization is that the revenue and excise taxes from cannabis sales will not benefit the local communities like they once did. Let’s say federal legalization allows for the shipment and cross-country marketing of cannabis. Well, a major cannabis company in Florida could capitalize on making the majority of its money in Colorado, but if they’re operating out of another state, none of that money or excise tax revenue would see the light of day in Colorado. It would benefit Florida instead.

This, in turn, means less money for Colorado school construction, drop-out prevention and anti-bullying programs. Less grant money would be available for school health professionals and early literacy. And, that would be a huge loss. In 2019-2020 alone, $25 million was allocated for the state public school fund.

And, if cannabis does become federally legal, the federal regulations could sink smaller businesses as well. If growers are kept to the strict, often burdensome, rules that the FDA imposes, growers could really feel the pain. Plus, the FDA has historically been hostile toward the cannabis industry, and many see legalization not changing how they treat the cannabis industry, and allowing the federal agency to take control of the regulation of cannabis could end in disaster. It would especially hurt the smaller businesses that are currently operating.

And so would the excess taxes. Companies in legal states are already struggling with simply paying the state and local taxes on cannabis, but that could get worse with federal legalization.

For example, Schumer’s proposal includes a 25% excise tax that would nearly stop small businesses in their tracks — especially if they are placed on top of high state taxes — but large companies would likely have no problem paying these. The proposed 25% federal tax wouldn’t tank a ton of the current businesses barely making it with the current tax structure.

The clause that could change it all

As of now, interstate sales of cannabis is prohibited by law. Cannabis can only be sold in the same state it was grown in. And, most states also have residency requirements for to own and operate a cannabis business. But federal legalization could undo all that, opening the borders of each state for cross-state cannabis business. Is that the only answer, though?

No, perhaps not. Some advocates for federal legality think the better approach would be to disallow interstate commerce while allowing for federal legalization. This would allow the businesses that are currently operating there to continue to do so without the fear of large corporations coming in and wiping them out. The problem with this approach is that there will almost certainly be lobbyists that will do all they can to guarantee interstate commerce so the people lining their pockets get their way.

And, there’s one roadblock in particular that stands in the way of blocking interstate commerce should federal legalization take hold, and that’s the Dormant Commerce Clause. The Dormant Commerce Clause bans states from passing legislation that discriminates against or excessively burdens interstate commerce.

With the federal ban on marijuana, many states have simply adopted their own regulations and programs that serve to benefit and promote their local cannabis businesses. But by failing to address this clause, small companies run the risk of being unable to compete.

Without specific congressional action to either pause, or eliminate, the clause — at least related to the cannabis industry — many state regulations and social equity programs that many licensees and businesses rely on could get cut the moment federal legality takes hold. Big business will be allowed to step in and potentially crush the little guys overnight.

The interference of big tobacco

And, there are already signs that it may. As the cannabis world becomes more and more mainstream, big tobacco companies are trying to get their foot in the market.

Recently, the big tobacco company Altria was lobbying for cannabis legalization in the state of Virginia. This was the first time that big tobacco lobbied for cannabis in the United States, either at the state or federal level.

Altria says they support the federal legalization of cannabis under an appropriate framework.

And, big tobacco is interested in the recreational market as well as the medicinal market. The big tobacco business has long realized that their current products are harmful to their consumers, and are now eyeing products that may keep them relevant in the changing market. Right now, vapor and heated products are the next big wave they are trying to ride. Either trying to get you off tobacco or getting you your next high, they want to be the one that delivers for you.

But big tobacco has the infrastructure and the financial means to crush anyone in its way — and if anyone is going to be lobbying against changing the Dormant Commerce Clause, it’s going to be big tobacco.

Back in 2018, Altria agreed to buy a 45% stake in the Canadian cannabinoid company Cronos Group for a whopping $1.8 billion. In 2019, Imperial Brands invested $123 million in Auxly Canna-bis Group. Auxly is focused on developing, manufacturing and distributing medical and recreational marijuana products to consumers.

Unfortunately, the big tobacco footprint is so big that it can crush the small businesses in their way. If states try to get this clause reversed for cannabis, the guys with deep pockets behind big tobacco will more than likely claim that they are having their right to interstate commerce violated. There is absolutely no way smaller businesses can compete with competitors like this. They lack the money and resources that big tobacco and other large corporations can and willingly will throw at it. And, if they have their way, the dispensaries and store fronts will be no different than the chain stores you drive past on a daily basis.

This is no different than the way Wal-Mart moved across the country starting in the 1980s and continues to do so today. The plan of attack was to set up in smaller towns and offer lower prices and wider selections than the smaller guys, leading to the stores within the town to shut down because they simply can’t compete. The butcher shop, sporting goods store, department stores, and everything else you can imagine will typically end up shutting its doors when this happens.

And, in many cases, the people who once owned and worked at these stores are forced to work at the same place that caused their demise.

The same thing can happen within the cannabis world if the proper laws are not put into place to protect existing businesses and the people who work for them.

Another good comparison is the beer industry. As of 2019, the American beer market was dominated by just a few companies, and the top three American breweries accounted for nearly 75% of all beer production.

Federal legalization of cannabis could cause the same consolidation to the market. Like craft brewers, marijuana growers may see so-called craft growers that fill the market for people who want craft weed — a necessary and potentially lucrative niche. But many people will opt for the equivalent of Bud Light so they can get a cheaper high, and the small growers will suffer from the big companies’ lower prices. That can only continue for so long.

What’s the solution?

Given the real threats that federal legalization can pose, some states
are being proactive when it comes to protecting against the potential downsides of federal legalization. For starters, Washington and Maine are working to protect the small cannabis companies from the potential threat of federal legalization by limiting the industry in their states. This may help insulate their cannabis businesses from the harshest consequences, should legalization happen, as statistics show that it’s typically the smallest businesses and the most marginalized communities that suffer the most when things like this occur.

But state protections likely aren’t enough. If federal legalization comes to fruition, Congress needs to take the necessary steps to protect small American cannabis companies. They need to do whatever they can to prevent the monopolization of the corporate giants of the cannabis industry — and make sure states do not limit the amount of licenses available for cultivation and sales.

One possible solution would be to limit the amount of product that these big companies can produce or control. There are many successful state programs that have shown to be profitable and inclusive — and Congress can use them as a guide to making things work out for everyone, guaranteeing that no one gets left behind.

While federal legalization sounds like a good idea, it’s important to hold lawmakers accountable so they do what is right on the state level. Without the proper laws to provide a safeguard for existing businesses, we could see many, if not all small cannabis businesses forced to close their doors.

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