The Current Long Winding Road of Cannabis Prohibition

cannabis prohibition

We live in a trickle down nation and what trickles down often does not reach the bottom. This happens across the board in every sector. It’s a political and economic existential crisis we have in this country of plenty when there isn’t enough “plenty” to spread around even when there is. We can thank the political and subsequent legislative infrastructure for why that is but that is not the purpose of this article, per se. Although I will point to a specific industry as to where the need for social equity might level the playing field and perhaps change the mindset going forward for other emerging sectors. And while leveling the playing field in this particular industry, which hinges itself on mental wellness positive outcomes, it could then have a secondary benefit of changing collective consciousness for the better. 

The industry I am writing about is cannabis. An industry than has a legal presence in 36 states medicinally and 16 states and Washington DC recreationally – might I remind the reader as I have in previous articles the origin of the word recreation: 

“late Middle English (also in the sense ‘mental or spiritual consolation’): via Old French from Latin recreatio(n-), from recreare ‘create again, renew.’”

The simple point is it is time for cannabis to enjoy its rightful status as a federally legal substance and not simply a ‘step-child’ industry without the same rights that other regulated legal industries enjoy. 

So I will start at the top where the trickle down anything begins including attitudes. The top is the Supreme Court. On June 28 Clarence Thomas stood up for the cannabis industry in a broad sense when he denounced the federal government’s inconsistent approach to marijuana policy. How did this come about? 

“Supreme Court Justice Clarence Thomas, one of the high court’s most conservative judges, on Monday said that the federal “prohibition on interstate use or cultivation of marijuana may no longer be necessary or proper to support the federal government’s piecemeal approach.”

That is huge for a conservative justice. He was not just musing to whoever justices might muse to.  This was an opinion filed in Standing Akimbo, LLC et al v. the United States.  

“Federal policies of the past 16 years have greatly undermined its reasoning. The federal government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.”—Thomas in the opinion

The opinion which comes as the court “declined to hear a new case related to an IRS investigation into tax deductions claimed by a Colorado marijuana dispensary”. 

“The justice points out that in 2009 and 2013 the Department of Justice issued memorandums outlining policies that prohibit the federal government from interfering with state-legal cannabis programs and businesses.”

“In the five-page opinion, Thomas points out, rightly, that “legality under state law and the absence of federal criminal enforcement do not ensure equal treatment” for cannabis businesses, noting that legal cannabis operators, under section Internal Revenue Service code 280E, can end up “still in the red after it pays its workers and keeps the lights on” because the company cannot take normal business deductions.”

“This disjuncture between the Government’s recent laissez-faire policies on marijuana and the actual operation of specific laws is not limited to the tax context,” Thomas wrote. “Many marijuana-related businesses operate entirely in cash because federal law prohibits certain financial institutions from knowingly accepting deposits from or providing other bank services to businesses that violate federal law.”

“The opinion also points out that were cannabis businesses hire armed guards to protect the cash “the owners and the guards might run afoul of a federal law that imposes harsh penalties for using a firearm in furtherance of a ‘drug trafficking crime.’”

“If the Government is now content to allow States to act ‘as laboratories’ “‘and try novel social and economic experiments,’” Thomas wrote in the opinion, “then it might no longer have authority to intrude on ‘[t]he States’ core police powers . . . to define criminal law and to protect the health, safety, and welfare of their citizens.’”

All of this brings me to the doorsteps of Congress. It is high time (and every pun intended) that cannabis businesses be able to utilize the banking system and stop carrying around bags of cash like an episode of Chicago PD.

Banks have been reluctant to transact business with cannabis and cannabis related businesses in states where cannabis is legal because of cannabis’ federal status, lest they be in violation of federal regulations. This has left cannabis businesses to conduct business in cash or use smaller financial institutions like credit unions. 

Without access to the banking system the industry itself is held back and only those “players” with access to large sums of capital and/or investors can enter the game – barring access to entry for the smaller business person or subjecting individuals to predatory lending. 

“Predatory lending, which gained special notoriety during the early 2000s, can debilitate a marijuana entrepreneur who’s trying to start or scale a business.”

“Predatory loans typically involve a lender who relies on unfair or misleading tactics to entice a borrower to sign for a loan with a huge interest rate or other terms that are bad for the borrower.”

“Marijuana companies are especially vulnerable, since most traditional lenders are reluctant to serve cannabis companies because the plant is illegal under federal law.”

“That situation has prompted marijuana entrepreneurs to seek out alternative forms of finance, including predatory lenders who can charge interest rates of 20% or more.”

“This has happened for quite some time in the industry,” said Evan Eneman, CEO of Ello, a Los Angeles financial, tax and advisory services firm serving MJ businesses.”

Enter SAFE. The House of Representatives recently approved the SAFE Banking Act with a 321-101 vote and will now be entering the Senate where Senator Chuck Schumer expressed his support for the bill. 

“The US House of Representatives recently approved the Secure and Fair Enforcement (SAFE) Banking Act of 2021, also known as the SAFE Banking Act (1). This law provides the possibility for financial institutions, such as banks, to conduct business with cannabis enterprises that are licensed in states which allow cannabis for either recreational, medical use, or both (2). The SAFE Banking Acts’ purpose is to remove the fear banks have of being penalized by federal authorities due to the illegality of cannabis at the federal level.”

“If the SAFE Banking Act is ratified into law, cannabis industry enterprises will have to jump over one less hurdle in running their business activities.”

Moving from the US Congress and to state politics we come to California where the legal cannabis industry has been struggling and the state is coming to its aid to the sum of $100 million. There is no question that the benefits of a legal cannabis industry far outweigh an illegal pot market however the legal weed industry in California – nearly five years after voters approved recreational sales  – still struggle to compete with the illicit pot market. 

The first question is why is there still a thriving illegal industry when it’s so easy to hop over a legal pot store, many of which look like weed’s version of an Apple store or a trendy boutique with artwork, tchotchkes’, and lounge chairs. The answer is money, honey as in taxes. 

“Almost across the board, states with legal adult-use cannabis tax the stuff at an alarming rate. The high taxes on recreational weed serve a few purposes. First, high taxes tend to financially limit how much product a single user can accrue, which seems like an effective way to keep marijuana use in check. More importantly, however, tax revenue is one of the most compelling reasons to legalize marijuana, and it is one that pro-weed advocates tend to harp on. Thus, when cannabis does gain adult-use regulations within a state, lawmakers aren’t afraid to jack the taxes up sky-high.”

California the “state of regulation” taxes the shit out of weed. I know, I shop legally. I like to fill up my basket with goodies from pre-rolls to drinks to edibles and then add the store’s shopping bag to my shopping bag collection. But there is a price for luxury. 

“State taxation. At the state level, California charges cultivators $9.25 per ounce of flower, $2.75 per ounce of leaves and $1.29 of fresh plant material.”

”Excise Taxation. The state also requires retailers to charge customers 15 percent on top of the market price of any product sold.”

“Local taxation. Counties and cities can levy their own taxes. For example, Los Angeles charges an additional 8 percent on adult-use weed products, and Humboldt County taxes growers an additional $1 to $3 per square foot, based on type of grow.”

“Quality control requirements. Though not a tax, per se, California does require cannabis products to undergo rigorous testing, which adds to the ultimate cost of the product.”

“As a result, adults over the age of 21 who want to purchase weed safely and legally end up paying between 40 and 80 percent above the standard price.”

Of course illegal growers don’t have that kind of overhead and consumers who have a source pay far less than I do for their high. So with that said the legal cannabis industry is struggling under the pressure and competition because not everybody shops the trendy market scene and it seems more don’t than do. On top of that there are other problems – like delays in getting licenses and so California is bailing out the cannabis industry. And that is okay. Obama did it with the auto industry – people needed cars and people their weed. 

On June 14, 2021 the California Legislature approved a $100 million plan to bolster the legal cannabis industry. 

“Los Angeles will be the biggest beneficiary of the money, which was proposed by Gov. Gavin Newsom to be provided as grants to cities and counties to help cannabis businesses transition from provisional to regular licenses.”

“Many cannabis growers, retailers and manufacturers have struggled to make the transition from a provisional, temporary license to a permanent one renewed on an annual basis — a process that requires a costly, complicated and time-consuming review of the negative environmental effects involved in a business and a plan for reducing those harms.”

“As a result, about 82% of the state’s cannabis licensees still held provisional licenses as of April, according to the governor’s office.”

“The funds, including $22 million earmarked for L.A., would help cities hire experts and staff to assist businesses in completing the environmental studies and transitioning the licenses to “help legitimate businesses succeed,” Ting said.”

“The grant program is endorsed by Los Angeles Mayor Eric Garcetti, who said in a letter to legislators that the money is “essential in supporting a well-regulated, equitable, and sustainable cannabis market.”

“Separately, the governor wants to give cannabis businesses a six-month extension beyond a Jan. 1 deadline to transition from provisional licenses by complying with mandates of the California Environmental Quality Act. That extension, which faces opposition for delaying promised environmental safeguards, was not included in the state budget bill approved Monday and is still being negotiated with lawmakers.”

The extension is drawing criticism from environmental groups saying that it goes against what voters were promised and on the flip side industry officials feel that the Governor’s proposals are not good enough. 

“At the same time, industry officials say the governor’s proposals do not go far enough in helping businesses struggling to stay open with provisional licenses while meeting what they see as burdensome rules under the state’s environmental regulations.”

“It is a significant amount of money, but I don’t know that it actually answers the problem of provisional licenses making it through CEQA analysis in a timely manner to get an annual license,” said Jerred Kiloh, president of the United Cannabis Business Assn.”

“He said delays in cities adopting rules, their limited staffing and lack of resources by cannabis firms mean some face two to four years to get through the licensing process. Many would face the prospect of shutting down, at least temporarily, if they don’t get a regular license by current state deadlines, Kiloh said.”

In 2019 there were more unlicensed businesses than licensed ones in California.

“In 2019, industry officials estimated there were nearly three times as many unlicensed businesses as ones with state permits. Although some industry leaders believe enforcement has reduced the number of illegal pot shops, a study in September by USC researchers estimated unlicensed retailers still outnumbered those that were licensed.”

“Supporters of legalization blame the discrepancy on problems that they say include high taxes on licensed businesses, burdensome regulations and the decision of about three-quarters of cities in California not to allow cannabis retailers in their jurisdictions.”

“Originally, pot businesses were supposed to transfer from temporary licenses to regular annual licenses by 2019, but many businesses were unable to comply in time, so the state allowed provisional licenses until Jan. 1, 2020, and then extended the deadline again to Jan. 1, 2022.”

The money may just be a drop in the bucket at that if these provisional licenses can’t turn into permanent licenses by January. 

“The $100 million would go to local agencies with the most provisional licenses for growing, manufacturing, distribution, testing and retail operations. Some of the money can be used by cities offering equity funding to cannabis businesses owned by people of color.”

Then what about equity funding? Where does that fit into this picture? And for those who do not know what equity funding is – the cannabis industry has a responsibility to social equity because the war on drugs impacted people of color more so than white people. 

It’s no secret that the prohibition of cannabis disproportionately and adversely impacted people of color. To counter this, many states and cities have implemented social equity programs in connection with the legalization of medical or adult-use cannabis.

“Social equity deals with justice and fairness within social policy. These programs attempt to ensure that people of color, and those with marijuana offenses prior to legalization, be afforded an opportunity to participate, meaningfully, in this burgeoning industry.”

Where does social equity fit into the $100 million which is part of the larger California Comeback Plan designed to help those suffering in the state. 

“This grant funding aims to serve local governments and a significant portion of the provisional license population, including a number of small businesses and equity operators,” Nicole Elliott, the governor’s senior adviser on cannabis, said in a statement.”

Under the plan the $100 million would be divided 3 ways: 

  • “The top eight jurisdictions that are home to the most provisionally licensed cultivation permits as of May 5 would receive 25% of the funds.”
  • “The top eight jurisdictions with the most provisionally licensed manufacturers, distributors, testing labs, microbusinesses and retailers as of May 5 would receive another 25% of the funds.”
  • “The third category would receive 50% of the funds, and the money would go to any of the top eight jurisdictions with the most provisionally licensed businesses that have received state grant money to support social equity programs.”

What does California plan to do with the future tax money from legal cannabis sales? 

“Governor Gavin Newsom’s $100 billion “California Comeback” plan calls for $630 million in future tax funds from legalized cannabis to be spent on health care, environmental protection, and public safety.”

For a quick recap on what and who the California Comeback plan helps in addition to the cannabis industry, which is in fact an essential business. 

“As the state progresses into the next stage of recovery from the pandemic’s economic downturn, the new budget attempts to rebuild equitably by prioritizing low-income families, individuals, and communities of color. Accordingly, the May budget pushes beyond the emergency relief provided for families and individuals in the “Early Action Plan” by providing a springboard for economic stability through the “California Comeback Plan.” 

Overview of the California Comeback Plan: 

  • $8 billion in Golden State Stimulus payments to Californians earning less than $75,000 annually, including undocumented immigrants. The state will give a $600 payment to tax filers who did not receive the first Golden State Stimulus payments or an additional $500 payment to Californians who file taxes with SSNs. Californians who file taxes with Individual Taxpayer Identification Numbers (ITINs) would receive a $1,000 payment. People who file taxes with ITINs are primarily undocumented Californians or mixed-status families and were excluded from federal stimulus payments during the pandemic.
  • Emergency rental assistance to cover 100% of back rent owed by Californians with low incomes. $2 billion in American Relief Plan (ARP) funds for utility assistance for renters.
  • $12 billion in state and federal funds over two years to address homelessness.
  • $35 million over five years for basic income pilot programs administered by cities or counties.
  • Expanding eligibility for comprehensive Medi-Cal coverage to approximately 80,000 undocumented adults aged 60 and older.
  • Significant increases in funding for K-12 education, including additional ongoing funding to support English learners, students from low-income families, and foster youth.
  • Universal transitional kindergarten for all 4-year-olds in the state phased in over four years.
  • 100,000 new subsidized child-care slots and financial assistance for childcare providers using federal and state funds.
  • Base increases and one-time funding for the state’s higher education systems. 
  • Establishing college savings accounts for California children in families with low incomes.
  • $7 billion in American Rescue Plan and state funds to address the digital divide.”

In Gavin Newson’s own words, “No state, including this state, has ever rebated more direct dollars back into the pockets of taxpayers.”

Author: Sherri Margolin (Dark Matters)

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