Pubdate: Mon, 02 Nov 2015
Source: Columbus Monthly (OH)
Copyright: 2015 Columbus Monthly
Author: Ivy Lamb


A closer look at the economic forces driving ResponsibleOhio's
controversial plan to establish 10 wholesale marijuana growers in the
state-and some of the plan's potential consequences

Ohioans have heard a whole lot about pot this year. In August,
ResponsibleOhio gathered enough signatures to put a constitutional
amendment on the fall ballot that would legalize both medical and
recreational marijuana use. The ResponsibleOhio plan-also known as
Issue 3-began attracting controversy long before the coming Nov. 3
vote, sparking heated debate over issues that typically surround
marijuana legalization, including how it would impact public health
and safety and concern over easier access for minors. But the section
of ResponsibleOhio's proposed amendment that's attracted the most
controversy centers not on how marijuana would be consumed, but how it
would be grown.

Issue 3 includes language limiting wholesale marijuana growth,
cultivation and extraction to 10 specific growing sites (the amendment
also allows residents 21 and older to grow up to four flowering plants
for private use). Opponents, including Ohio Secretary of State Jon
Husted, claim this restriction on licensed growing sites is paramount
to writing a business monopoly into the state constitution.
ResponsibleOhio executive director Ian James disagrees, saying the 10
growing sites would compete with each other as part of a regulated
industry. He also points to language in the amendment that would,
after four years, allow for one additional growing site to be approved
per year, should demand exceed supply.

Much coverage has been given to the political fight over the proposed
growing sites, partly because the 10 sites have already been claimed
by ResponsibleOhio's wealthy investors-a big-business approach that
doesn't sit well with many people who typically would support
legalization. Why did the group decide on a limited number of sites in
the first place? The answer deals with regulation and the economic
realities of trying to enter a nascent industry still considered
illegal by the federal government.

"When you have thousands of grow licenses, it's virtually impossible
to regulate," James says. "We said, 'Let's choose 10 over the first
four years so that it can be properly regulated, and if they don't
meet demand, the state can add more licenses.' " (The method by which
new grow site owners would be selected would be left up to the Ohio
Marijuana Control Commission established in the amendment.) James says
the group did look at other states for guidance, but the specific
number was also influenced by the investors ResponsibleOhio approached
who were willing to back the amendment.

"When you legalize marijuana in any state, these [businesses] aren't
going to be small mom-and-pop organizations," James says. "These are
going to be people and companies that have incredible financial
backing because they have to; under the current laws and regulations,
banks don't want to touch them."

That economic pragmatism is one of the primary arguments
ResponsibleOhio uses to defend its approach. But banking issues are
only one thread in the tangled web of regulations that surround
marijuana commerce. Taxes are another problem, notes Justin
Breidenbach, a professor of accounting at Ohio Wesleyan University who
has spent the past two years studying the legal marijuana industry in
states like Colorado and Washington. Businesses selling Schedule I and
Schedule II drugs are forbidden from deducting most expenses, forcing
them to scale up. "The only way to get around the tax issues is to go
very big and scale very high," Breidenbach says. "The margins they're
dealing with are like a grocery store-you have to grow and sell a lot
to make money."

And while Ohio growers would likely have to go big to survive,
Breidenbach still worries supply could be an issue. Some states, such
as New York, have strict limits on growing sites. But, Breidenbach
says, New York legalized only medical marijuana use. Colorado and
Washington, where medical and recreational use are both legal, each
have hundreds of licensed growers.

Of course, those numbers don't paint the whole picture. According to
Breidenbach's research, if you look at growing acreage in relation to
the state's population, the 10 proposed sites potentially could supply
enough to meet demand. On the other hand, Breidenbach also believes
that based on what's happened in other parts of the country,
Ohio-grown marijuana would be sought by residents of neighboring
states, where the drug is still illegal. "Are the 10 growing sites
enough? That's a wide-open question," he says.

The amendment does allow for more growing sites to be added, but
"timing-wise, that creates some issues," Breidenbach says, "because
you've got a period of four years where demand maybe isn't being met.
It's also going to take at least a year for a new facility to get up
and running, so that's more like five years of unmet demand. And
that's a long time in the business world."

Unmet demand wouldn't just be an inconvenience for consumers-it would
have the potential to create rampant overpricing, which would likely
lead people to buy cheaper marijuana from home growers not licensed to
sell their product. In the industry, this is known as the "gray
market," and it creates a host of regulation problems, including
issues with product safety testing and enforcing the rule that
marijuana can't be sold to minors.

Of course, the economic forces that drove ResponsibleOhio's decision
to create a limited number of growing sites could disappear in the
future, should the federal government give in to changing cultural
attitudes and legalize marijuana on a national level. "If that federal
tax effect changes, which it might in the future, especially if a
state like Ohio legalizes, then these growers are really going to reap
in the rewards," Breidenbach says. "You'd be more like a software
company in terms of profits."

Many Americans assume a regulated, for-profit model similar to the 
alcohol industry is the only way to legalize marijuana, but national 
drug policy experts say the for-profit model is not necessarily the best 
option. "One of the issues of the for-profit model is Pareto's law, or 
the 80-20 rule," says Beau Kilmer, co-director of the RAND Drug Policy 
Research Center. "When it comes to marijuana, 80 percent of profits come 
from only 20 percent of users," he explains, referencing a 2014 study he 
helped conduct for the White House Office of National Drug Control 
Policy titled "What America's Users Spend on Illegal Drugs: 2000-2010."

According to Kilmer, that figure means for-profit marijuana growers
have a vested interest in focusing advertising on heavy users. And
while Issue 3 does include some restrictions on advertising, the
United States' commercial free speech rules mean advertising cannot be
banned entirely, as it is in countries like Uruguay. Kilmer adds if we
look outside the U.S., we'd see other potential models that are not
currently part of the conversation here, including state monopolies,
nonprofit co-ops and for-benefit corporations that include social and
environmental goals in their mission.

In terms of the policy spectrum, Kilmer says a regulated, for-profit
industry isn't the most extreme option. Kilmer and Breidenbach agree a
regulated industry is certainly safer than an unregulated one.
However, at this stage, no one truly knows the best approach to
creating a regulated marijuana industry, and any new plan carries a
certain amount of risk. On Nov. 3, Ohio voters will decide how much
risk they want to take in order to have legal access to marijuana-and
if they want to write ResponsibleOhio's for-profit model into the
state constitution.
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MAP posted-by: Matt