Politicians wrestle with legal weed

Gov. J. B. Pritzker and other backers of recreational marijuana have said that ending cannabis prohibition is about social justice, public health and reality, not just money.

Nonetheless, Pritzker’s financial goals when it comes to pot are ambitious – his draft budget included $170 million from licenses and fees during the next fiscal year. Potential tax revenue isn’t clear in a 522-page bill that addresses such granular issues as packaging -- it would be illegal to sell marijuana in a container that includes a depiction of a marijuana leaf – and hours of operation: Weed stores could be open between 6 a.m. and 10 p.m.

Upon releasing a bill Saturday, May 4, the governor’s staff promised that the Department of Revenue soon will calculate revenue projections including pot taxes that would start rolling in next January, when Pritzker wants to start legal sales. And so, with the General Assembly scheduled to adjourn on May 31, one of Pritzker’s campaign platform planks, legal recreational marijuana, was unveiled absent key financial data.

It promises to add up to a bongload of bucks, with Pritzker selling his plan based on promises to make room for minorities and sundry small-timers so that Big Cannabis doesn’t take over. But, under the governor’s bill, startups won’t be treated the same as bigtime operators with lobbyists and track records. And that has some longtime marijuana activists worried.

“We already have cannabis kingpins with the medical marijuana program,” says Dan Linn, executive director of the Illinois chapter of the National Organization to Reform Marijuana Laws. “I think this program will just create more cannabis kingpins without much room for the little guy.”

“You can’t just start a dispensary”

Legalization is popular nationwide, with 61 percent of Americans, including 76 percent of Democrats and 54 percent of Republicans, favoring legal pot in a recent Associated Press poll. Such sentiment explains why the issue is shifting from ballot boxes to state legislatures.

The first nine states to legalize pot for consenting adults did so via referendums and initiatives, with Colorado and Washington leading the way with ballot measures approved in 2012. Last year, Vermont lawmakers became the first to pass a law, absent a referendum or initiative, to legalize recreational pot. The Illinois General Assembly now stands to be the second.

In Vermont, legislators took the ultimate laissez-faire approach, legalizing pot without addressing how it should be sold or taxed, and so the state takes no cut – Vermonters now are wrestling with taxation questions. But in Illinois and elsewhere, money has gone handin-glove with legalization, with Maine and Michigan still working on plans to sell and regulate recreational pot after voters mandated legalization.

The retail recreational marijuana market in Illinois is worth between $1.7 billion and $2.6 billion annually, according to a February study prepared by consultants hired by Democratic legislators who back legal pot. The state would collect a 7 percent wholesale tax and retail taxes ranging from 10 percent to 25 percent, depending on the form of cannabis and its potency.

Under the governor’s bill, existing medical marijuana growers and sellers likely would have the market to themselves when sales began on Jan. 1. In the case of dispensaries, the state would have until next May, four months into legalization, to issue 75 new licenses, with the legislation spelling out where stores would be located. Springfield would get one new outlet in addition to existing dispensaries that sell medical pot in downtown and Grandview; Chicago and surrounding communities would get 47 new shops.

The state would have until July 1 of next year to issue new cultivation licenses. If the state waited until the last minute before issuing them, 21 existing medical marijuana growers could have the market cornered for a year or more, considering the time it takes to construct facilities and grow a crop.

After the first round of awarding new licenses, the state would have until the end of 2021 to issue 110 additional retail and 60 cultivation licenses. Going forward, the number of licenses would be capped at 500 dispensaries and 180 grow operations, with most of the cultivation centers relatively small.

Under the bill, nine large cultivation centers would be allowed, in addition to the 21 that already exist, with each permitted to grow as many as 100,000 square feet of marijuana. The remaining 150 growing operations each would be limited to 14,000 square feet. At full build-out and production, the large facilities collectively would be licensed for 900,000 more square feet than the smaller facilities dubbed “craft grows.”

Existing pot businesses would pay premiums for the first licenses to grow recreational weed.

Medical cultivation centers that want to grow recreational weed would pay a flat $100,000 fee, plus an additional fee of between $100,000 and $500,000 to a state cannabis business development fund, with the amount based on volume of medical pot sales. Existing dispensaries would pay less, including a flat $30,000 fee, plus as much as $100,000 to the business development fund. After that, as part of a social-equity effort aimed at making up for years of damage from the war on drugs, both cultivation centers and dispensaries would contribute as much as $100,000 apiece to either cannabis industry education programs at community colleges, the business development fund or job programs for ex-convicts or residents of disadvantaged areas identified by the state.

Instead of giving money to the business development fund, community colleges or job programs, existing dispensaries and cultivation centers could satisfy the social-equity provision by loaning at least $100,000 to a startup pot business and providing incubation services, with the proviso that it could have no more than 10 percent ownership in the new entrant. And for $230,000 in fees, each existing dispensary that wants to sell recreational pot could add a second location in time for opening day, with geographical limits that would keep new locations with the same areas but at least 1,500 from other cannabis shops.

The recreational program wouldn’t affect a burgeoning medical marijuana industry, which realized $136 million in retail sales last year and brought in $44 million through the first three months of this year. There are no plans to grant new licenses to grow or sell medical pot or change existing fee structures.

While Linn predicts windfalls for large marijuana businesses, Chris Stone, chief executive officer of Ascend Illinois, a business created in recent months when a Massachusetts firm purchased two dispensaries and acquired leasing rights for a Pike County cultivation center, said concerns about Big Cannabis gaining unfair advantages over small operators are overblown.

Given the state’s experience with medical marijuana, it would take about a year for a new entrant to have cannabis ready for market once the state issues a license, Stone says, but the period of time that established operators have the market to themselves shouldn’t be a big deal.

“I think people need to be a little patient,” Stone said. “I think there’s going to be plenty of opportunities. You can’t just start up a dispensary, you can’t just start up a grow operation.”

“The smaller person can’t afford it”

No other state charges anywhere close to six figures for an application or license to grow, process, transport or sell recreational marijuana, and so Pritzker’s plan stands apart. Licenses for newcomers in Illinois also wouldn’t come cheap.

New cultivation centers, each limited to 14,000 square feet of growing space, would each pay $40,000 nonrefundable application fees, plus $100,000 upon being awarded a license. In addition to having access to $100,000 in liquid assets, new dispensaries would pay $5,000 nonrefundable application fees. Annual retail licenses would cost $30,000. Pritzker's plan also establishes a processing license for entities that turn raw cannabis into concentrates and other products, with application fees set at $5,000 and annual licenses at $40,000.

With annual license fees set at $30,000, Nevada is the only state with five-figure license fees for businesses permitted to grow or sell recreational marijuana.

Looming high licensure costs in Illinois are part of the reason some, including the National Association for the Advancement of Colored People, oppose legalizing recreational pot.

Teresa Haley, president of the Illinois chapter of the NAACP, says her organization’s opposition to recreational marijuana is mainly based on health concerns and the potential that folks with histories of substance abuse will be vulnerable if weed is legal. But money, she says, also is important.

Haley said she knows three people who together hoped to open a dispensary under the state’s medical marijuana program but found that $800,000, the amount they’d secured, wouldn’t be sufficient to cover licensing costs and other startup expenses totaling more than $1 million, she recalls. A cultivation center also would have been tough, she says. “Most black people don’t have acres of land,” she says.

Backers of legal weed tout jobs, but pay can be paltry. While CEOs of large cannabis companies make six or even seven figures, trimmers who clip leaf from buds make less than $30,000 a year, according to a recent salary survey published by Marijuana Business magazine. Master cultivators in charge of growing operations can earn $100,000 or more, as can experts who know how to extract THC from raw cannabis, according to the magazine, but bud tenders who wait on customers in dispensaries make less than $15 per hour. “It’s OK for us to work in these places, but we want to own them,” says Haley. “The smaller person can’t afford it.” While the NAACP opposes recreational marijuana for reasons aside from economics, Haley says her opposition doesn’t extend to medical marijuana.

Lou Lang, a former state representative who pushed medical marijuana through the General Assembly before becoming a lobbyist, allows that the state’s medical marijuana program hasn’t benefited minorities to the extent the program’s creators wanted. “That didn’t work out to get us to where we wanted to go,” he says.

Under the governor’s bill, the Department of Commerce and Economic Opportunity would set up a loan program to help disadvantage license applicants with startup costs. Pritzker’s plan also would reduce license application fees while awarding bonus points in licensing decisions to applicants deemed to have suffered disproportionate consequences from the criminal justice system. The list includes people who’ve been convicted of marijuana offenses and members of their families.

After regulatory costs are covered, 25 percent of proceeds from taxes and other revenue generated from recreational marijuana would be deposited in an account dubbed the Restoring Our Communities fund, a new pot of money that would provide grants aimed at reducing violence, particularly gun violence, and increasing economic development in communities ravaged by violence, poverty and high incarceration rates. A board including legislators, former inmates, experts in violence reduction, members of community groups, officials with several state agencies and representatives from the governor’s office and attorney general’s office would decide how the money is spent.

In addition to money for the new fund, 35 percent of recreational pot revenue would go to the state general fund, 20 percent would be allocated for substance abuse and mental health treatment, 10 percent would go toward paying the state’s overdue bills, 8 percent would be sent to the state Law Enforcement Standards and Training Board and 2 percent would be spent on drug education and substance abuse awareness.

Different states, different schemes

With 10 states having passed pot legalization measures, no two regulatory schemes are the same, ad so there is no surefire template.

The day before Pritzker announced his plan, Lang, the state representative-turned-lobbyist for the marijuana industry, said he agrees with state Rep. Kelly Cassidy, D-Chicago, who’s pushing legal pot in the legislature and has been quoted as saying no state has mastered legalization.

“I don’t think any state has done it right, either, and I hope we do,” says Lang, whose client list has included Chicago-based Cresco Labs, which owns three Illinois cultivation centers and, with operations in 10 other states, is one of the nation’s largest cannabis companies. “The point is, we have to find a happy medium.”

Linn, who manages a Grandview dispensary in addition to heading the Illinois chapter of NORML, says the state’s track record with medical weed hasn’t been great. At $250 to $400 an ounce, medical marijuana costs more in Illinois than other states, he says, and there have been shortages.

On the plus side, Linn says, Pritzker’s plan would allow people to grow up to five plants at home, which would act as a safeguard against high prices. But giving an early start to existing medical pot businesses, charging high licensing fees and capping the number of licenses undercuts the goal of extending economic opportunity to the disadvantaged, he says, while setting the state up for recreational pot shortages and gouging.

“We’re basically treating this crop like it’s plutonium or a huge vice,” Linn says. “What we should be doing is fostering a cottage industry and not just making this a playground for venture capitalists.”

To help prevent companies from gaining overly large market shares, the Pritzker plan would limit the number of licenses a single person or business could own. But Big Cannabis has found ways around such restrictions in other states. In Massachusetts, the state is investigating cannabis companies that have told investors they control as many as a dozen retail pot stores, operating under different names, despite regulations barring ownership of more than three outlets. In California, large growers have skirted limits on big operators by acquiring scores of small cultivation licenses.

While large out-of-state marijuana companies have set up in Illinois since medical marijuana became legal, Washington state keeps the industry local by barring nonresident ownership of pot shops or cultivation operations. Pot business owners can get financing from sources outside Washington state, but such financing must be approved by state regulators.

Washington also is notorious for low licensing fees. The application fee is $250 and an annual license to grow or sell weed costs $1,480, with each growing license allowing operations as large as 30,000 square feet and growers allowed as many as three licenses. With a cap of 556 retail operations, Washington (population 7.5 million) has licensed 506 outlets, more than would be allowed under Pritzker’s proposed cap for Illinois (population 12.74 million). After issuing more than 1,000 licenses to growers since voters approved legal pot in 2012, Washington has stopped accepting new applications. So has Oregon, where licenses are cheap and 664 applications were submitted in two weeks after the state last year announced that it would soon stop issuing new permits for marijuana businesses.

Washington also is famous for low prices, with ounces last year retailing for as little as $40. Taxes for recreational reefer in Washington are the highest in the nation at 37 percent, all charged at the retail level, with per-capita tax revenue also near the top at $42.96 for every state resident. Colorado, which has 1,400 licensed cultivators and levies a 15 percent wholesale tax plus a 15 percent retail tax, had the highest per-capita tax revenue of any state last year, with $46.79 in pot taxes collected for every state resident. Washington and Colorado were the first states to legalize recreational pot.

On the other hand, there is California, where licenses are relatively cheap, taxes are high and sales have been disappointing since recreational retailers opened last year. At $8.72 per capita, California last year ranked dead last in terms of taxes collected from recreational pot -- unless you count Vermont, which levies no taxes on pot sales.

“California made a mess of it,” Lang says.

“California has thousands of dispensaries. There’s some loose regulation. It’s open season. I don’t think the state of Illinois should succumb to that. … The Washington model may be slightly better.”

With the legislature scheduled to adjourn on May 31, lawmakers have less than three weeks to pass a bill. Will it happen? Stone, who says he participated in working groups that helped craft the current version of the bill, says he’s not sure, but tweaks are likely.

“I would have told you four months ago it would happen,” Stone says. “I don’t know if I could tell you that now. You’ve got some stakeholders that are going to be opposed to some of the provisions that are in the bill. I know law enforcement is going to be up in arms about the home grow.

“I’m assuming there’s going to be negotiations between stakeholders and the administration in the next three weeks if they really want to get something done.”

Contact Bruce Rushton at [email protected].