March 31, 2021

The Benefits of Market Expansion

For years, cannabis advocates, entrepreneurs, and legislators have worked, with limited success, to expand the regulated market in California. Most legislative proposals have taken a forceful approach with local jurisdictions, mandating cities and counties to regulate based on various factors, such as how their constituency voted on Proposition 64. These tactics resulted in strong pushback from local authorities who want to maintain the local control granted to them by the California Constitution, which led to the ultimate demise of such legislation. This year, Senator Nancy Skinner is taking a different, more measured approach with her SB 398, which seeks to support local jurisdictions as they work with limited resources through the complexities of regulating a multifaceted industry.

SB 398 provides local jurisdictions with a simplified option for regulating the cannabis industry. Locals would need to opt in to an agreement with the state, which would then take on all cannabis licensing responsibilities and collect taxes on behalf of the locals. The locals would retain control over land use and other local non-cannabis-related permits and licenses. The proposal requires compromise from both industry and local government. For example, although the bill does not cap the number of licenses nor does it limit the business types allowed by a city or county, the locals retain zoning authority. In addition, there is still a local tax (set at 6%), but the rate does not change over time and the locals cannot impose any additional cannabis taxes. The benefits to both sides, however, are numerous.  

Local licensing efforts have often been plagued by lawsuits, required significant local resources, and sometimes dragged on for years. Despite the appeal of additional tax revenue, these issues often make it so it is not worth it for local jurisdictions considering regulation to begin the process. By removing these barriers, SB 398 would help more locals open their doors to an industry that would boost employment rates, stimulate the economy, and fund public programs that support and promote community health. It would also create some oversight for the distribution of cannabis equity grants. This could then strengthen local social equity programs that have struggled thus far to help the communities they intend to support and serve. From the industry perspective, business owners would have one set of cannabis rules to follow – those mandated by the state – and there would be parity between non-cannabis and cannabis businesses regarding local licensing requirements. Social equity applicants could receive more support and have more opportunities for licensure. It would also help establish some much-needed consistency in all cities and counties that opted in, rather than expanding a patchwork of cannabis regulatory environments throughout the state. Most importantly, it could help create legal access to markets that would otherwise be difficult to reach.

Two of the biggest challenges California faces regarding the cannabis industry involve streamlining the regulatory structure and eliminating the illicit market. To make measurable progress on these issues, the state needs to take a multi-pronged approach that focuses on expansion of the regulated market and is supported by true enforcement efforts and thoughtful consideration of its regulatory requirements. Other states, such as Colorado and Oregon, have seen a decrease in the illicit market as their regulated market has grown. This can happen for California as well, but it will require the state to create incentives for locals to make it easier for them to engage with the industry. SB 398 is a good first step, and a bill that will be important to watch this legislative session. The bill is scheduled to be heard in the Senate Governance and Finance Committee on April 8.

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.