A Tale of Two Marijuana Markets: California & Colorado

All eyes turned to Colorado in 2012 when voters passed Amendment 64, leading to the legalization of recreational marijuana in 2014. Colorado was the first state to implement recreational marijuana rules, making it the nation’s most mature market. Colorado quickly became a marijuana mecca, driving the trend and setting standards for subsequent states that fell in line. As the pioneer of cutting edge cannabis reform, Colorado continues to provide insight into how a regulated market functions. With the November 2016 passage of Denver Initiative 300, granting businesses the ability to allow adult marijuana consumption in designated public areas, Colorado continues to set pot precedent. Colorado’s marijuana narrative tells a story of successful implementation, performance, and continual growth.

From the nation’s oldest regulatory framework to its largest, California’s cannabis market will become a legal reality on January 1, 2018. The longtime pot-friendly state will be governed for the first time since medical marijuana became loosely regulated in 1996. Rules and regulations are being crafted to ensure the booming black market will not undermine California’s attempt to create the nation’s largest, legitimate marijuana economy. California cannabis is projected to be a $5-$7 billion dollar business, with state and local governments collecting taxes breaking a billion during the first year. In a state with such economic vitality, sporting the 6th largest economy in the world, California’s new industry is set to impress.

ECONOMY

From July 1, 2104 to June 30, 2015 the Colorado Department of Revenue reported marijuana generated $700 million in revenue, and nearly $76 million in taxes during the first year of legalization. Just shy of one billion, sales jumped to $996 million in 2015, with marijuana taxes and fees almost doubling at $135 million. In 2016, Colorado crossed the $1 billion dollar mark in the first 10 months of the year, totalling 1.3 billion in revenue, and $200 million in taxes collected. Both state and local municipalities are beginning to reap the budding benefits from Colorado’s marijuana regulation and tax structure. Colorado imposes three different taxes on marijuana sales: 15% excise tax, 2.9% tax on medical and recreational sales, and 10% sales tax on retail sales. In May 2017 Colorado Gov. John Hickenlooper signed the budget bill creating the “Marijuana Tax Cash Fund”. All tax revenue pouring in from pot sales goes into the general fund which distributes dollars to various programs. Amendment 64 supporters were promised the first $40 million collected from recreational excise tax each year would go to the BEST (Building Excellent Schools Today) fund. BEST backs capital school construction, renovating and replacing deteriorating public schools. Based on legislative appropriations for the 2016-2017 fiscal year, the general fund will create housing programs for at-risk populations, health programs in public schools, aid the mental health crisis in jails, combat Colorado’s current opioid epidemic, target illegal marijuana sales, and contribute to continued industry oversight. Although the influx of new cannabis revenue hasn’t made a dent in statewide debt, many rural economies are experiencing substantial benefits. Amendment 64 legislation left it up to individual towns and cities to decide whether or not to allow marijuana business. Similarly, municipalities also have the ability to disperse local tax funds how they choose. For Colorado towns struggling with the collapse of industries past, typically coal and oil, embracing cannabis has had a significant impact on their local economy. In a southern Colorado town, Pueblo pot proceeds are funding the country’s first cannabis scholarship program. The Pueblo County Scholarship Fund will benefit county high school graduates planning to attend Pueblo Community College or Colorado State University-Pueblo.

California is projected to collect more than $1 billion in tax and licensing revenue in 2018, the first year of adult-use legalization. Nearly two decades after approving medical marijuana, the new adult-use market is estimated to increase more than tenfold. California’s blossoming industry is set to be the “pot” of gold at the end of a regulated rainbow, and has been touted as the nations legalization tipping-point. New Frontier Data and ArcView Market research predict tax revenue will balloon to $3 billion in year two and nearly $4 billion by 2020. Two types of taxes will be levied on California bud beginning in 2018; a cultivation tax of $9.25/oz. on “flowers” and $2.75/oz. on “leaves”, and a 15% excise tax on medical and retail consumers. Due to an oversight in Proposition 64, medical marijuana consumers have been given an extended tax holiday through the end of 2017. The initiatives blunder effectively eliminated the medical marijuana sales tax buyers had been shelling out prior to passage. Despite promises of explosive growth, the snafu could cost California nearly $50 million before it begins collecting billions in 2018.

While Colorado legislation has chosen to funnel the majority of marijuana money into the public school system and local governments; California has chosen a different avenue, imposing restrictions on public use of the funds. The measure shys away from relying on a ‘sin’ tax to fund ongoing budget requirements. Instead, California pot capital will be used to offset the perceived social and financial harms that surface from legalization. The new stream of tax dollars will create and expand drug use prevention and treatment programs, benefit at-risk youth, and fund research, environmental restoration, and law enforcement efforts specific to cannabis. Administrative start-up cost will be taken off the top to cover regulatory oversight of a new marketplace. $10 million annually for 11 years will be awarded to California public universities researching and evaluating the impact of legalization on public health, safety and economic influence. The California Highway Patrol will receive $3 million annually for the first five years to develop protocols for drivers suspected of being impaired by marijuana use. Various social and medical programs will receive assistance, beginning with $10 million, and increasing annually until 2022. Appropriations granted University of California’s, San Diego Center for Medical Cannabis Research $2 million annually for an undetermined amount of time. Californian’s are waiting to see how the new source of revenue will break down on a community level. Local measures appearing on city and county ballots propose levying separate local taxes. Authorities are still puzzling over a proper balance of municipal taxes to benefit the local budget, without forcing cultivators and vendors back into the black market. The budding business potential is preparing California for a new high; however, similar to Colorado, the new stream of tax revenue will only contribute approximately 1% to the state’s budget.

RULES AND REGULATIONS

The nation’s attention has turned to the Golden State while California regulators scramble to create a new recreational framework. California’s ‘wild west’ governance under Proposition 215, resulted in little to no state oversight of the medical marijuana industry for the past 20 years. The Medical Cannabis Regulation and Safety Act (MCRSA) was passed in 2015 moving the state closer to a regulated and transparent industry. On November 8th the Control, Regulate, and Tax Adult Use of Cannabis Act (AUMA) was passed, legalizing adult-use marijuana in California. Beginning November 9, 2016 recreational marijuana consumers, 21 and older, can legally possess up to one ounce of marijuana, or eight grams of concentrate. An individual also has the right to grow up to six plants inside their residence, same as Colorado. With new freedoms come a bevy of regulations encompassing cultivation, manufacturing, testing, distribution, and sales.

With existing farms estimated between 50,000-60,000, the sheer size of California’s agricultural base and anticipated demand, intensifies the scope of a regulatory rollout. Unlike Colorado’s system of dual regulation, California is attempting to amalgamate the two structures. Colorado compliance expert, Kady Cravens, believes they are on the right track.

“This is a wise choice. Separate structures and vertical integration in the medical market comes with a lot of confusion. There are essentially six license types in Colorado – store, cultivation, manufacturing, testing, transporter, and operator. Once you divvy those up between medical and recreational, we have to run all licenses as their own business. Meaning we have to operate, file, and report them separately. California is eliminating the need for multiple licenses, fees, and work from a seed-to-sale point of view.”

Governor Jerry Brown’s Budget Trailer Bill passed in June 2017; the legislation attempts to streamline the process of combining MCRSA and AUMA under one regulatory structure. The bill leans toward the more liberal regulations outlined in AUMA. Marrying the rules are projected to lower industry operating cost and ‘maximize public and consumer safety.’ California’s experimentation with a single regulatory structure could heavily influence other states depending on their success.

COMMUNITY IMPACT

With current Trump administration and drug warrior Attorney General Jeff Sessions promising to crackdown on federal marijuana policy, supporters and opponents have turned to Colorado for data on the pot-crime link. While Jeff Sessions speaks to the dangers of “real violence” fueled by the adult use of marijuana, officials armed with state and local data continue to debunk connections between increased crime rates and cannabis legalization. Figures released from the Drug Policy Alliance noted in the first year of legal recreational cannabis sales in Colorado, Denver, the hub of pot sales, saw a 2.2% drop in violent crime and an 8.9% reduction in property crime offenses. In 2012 City of Denver safety officials began tracking marijuana-related crimes, concluding they accounted for less one percent of all offenses calculated. Arrests for the possession, cultivation and distribution of marijuana dropped dramatically, preventing the criminalization of non-violent offenders. According to a federal survey released in early September, teen marijuana use has fallen to a 20-year low. Colorado’s high school cannabis use falls below national average; a drop in teen use could reflect a diminishing black market, attributed to current policy. Effects of California’s legalization measure remain to be seen, but are likely to mirror Colorado in terms of crime and youth consumption. Unique to California’s Proposition 64 is a lesser-known provision allowing people previously convicted of marijuana-related crimes to ask for reduced sentences or record changes from felonies to misdemeanors.

In the industrial, working-class Denver neighborhoods of Globeville and Elyria-Swansea, the significant presence of marijuana operations have left long-time residents concerned and questioning the industries local impact. In a 15 mile vicinity, there are roughly 21 marijuana license per square mile, leaving residents feeling inundated by cannabis businesses. A new, Denver specific requirement, now mandates a community engagement plan must be submitted with new license applications and renewals. The requirement is an effort to proactively engage cannabis businesses with neighbors and fellow businesses, and ensure they do not negatively impact the surrounding community. Owner of Elyria-Swansea pot-shop Starbuds, Brian Ruden, believes the new stipulation encourages cannabis companies to give back to their community.

“Starbud’s has met with local community groups. We’ve had open, honest conversations about their perceptions of the marijuana industry, how it impacts them, and how it can help them. Starbuds collaborated with neighboring residents, drafting a letter to the city requesting pot tax funds for community development. Residents requested a bridge over the highway to connect the isolated neighborhood and college scholarship programs. We’re trying to hear their needs and help facilitate where we can.”

Denver license applicants address the requirement with varying approaches. The community engagement plan must include a “plan to create positive impacts in the neighborhood where the business is located”, “procedures for addressing neighborhood concerns about the business”, and “policies to promote community engagement and involvement in the marijuana industry in a positive way.” Reports out of Colorado suggest concerns of negative impacts on local residents are unfounded. Legal cannabis operations appear to benefit neighboring communities through their contribution to economic development, charitable organizations, and community service programs.

Many California cities have chosen to compel positive industry influence by requiring a similar neighborhood compatibility plan and community benefits section as part of their licensing process. Applications are ranked on a variety of evaluation criteria during a four phase process. The neighborhood compatibility plan is part of the initial ranking, the section should address how the organization “will be managed, so as to avoid becoming a nuisance or having impacts on its neighbors and the surrounding community.” Applicants are assessed on the community benefits criteria if they move past the initial evaluation phase. The community benefits section should describe benefits the business would “provide to the local community, such as employment for local residents of the City, community contributions, or economic incentives to the City.” Community impact priorities vary between applications; businesses often identify program areas of interest. These initiatives look different for each marijuana organization, from neighborhood revitalization, to youth development, to environmental restoration.

California cannabis community impact is currently measured and viewed in terms of economic development and tourism. The potential economic impact from Proposition 64 cannot be understated in terms of job creation. Although evaluation models between Colorado and California are not directly comparable due to California’s existing robust medical market, legalization is sure to be a boon for the states job market. California’s pot paradise will attract a great deal of cannabis tourism. Marijuana enthusiast have been visiting the state for years, capitalizing on the existing commerce will be beneficial for cities embracing pot sales. Municipalities with strong opposition to legalization are taking steps to ban sales in an attempt to squelch pot tourism within their communities.

CITY COMPARISONS

Southeast Colorado cities Pueblo and Trinidad have fallen on good fortune thanks to the states green rush. Colorado’s marijuana law allows for local control, giving municipalities the option of embracing or opposing sales. The once booming, blue-collar, coal mining towns of Pueblo and Trinidad opted into Colorado’s pot experiment and have experienced an economic revitalization. Trinidad pot-shops are the first encountered traveling north from New Mexico on I-25. Trinidad’s border state status has created extensive marijuana-driven tourism, where the majority of customers come from out-of-state. Approximately 10% of Trinidad’s general fund is made up of tax revenue from yearly marijuana sales. The infusion of marijuana-related cash keeps local officials coming back for more.

A perfect storm of industry-friendly regulations and abundant sunshine, access to water, land, and labor, make Pueblo an oasis for growers looking to cultivate outdoors. Pueblo’s pot bandwagon offers hope to the once economically depressed city. Colorado municipalities can choose to impose their own tax; Pueblo County’s 2% excise tax on cultivation will collect more than $1 million this year. Pueblo has faced devastating unemployment rates since the Colorado Fuel and Iron Company shut its doors in the 1980s. The city’s current plummeting unemployment rate is closely tied to marijuana-related job growth. Cannabis projects are keeping Pueblo’s construction and real estate sectors satisfied. Pot taxes have helped fund the new Institute of Cannabis Research at CSU-Pueblo; the nation’s first cannabis research center at an accredited university. Los Sueños Farms, the largest legal cannabis farm by acreage in North America, calls Pueblo home. Marijuana has given Pueblo a new economic identity. Still, even in the most accepting cities, opposition rises. Similar ballot measures in both Pueblo County and City (Question 200 and 300, respectively) requested a repeal of marijuana ordinances for the sale, cultivation, and manufacturing of retail cannabis. If passed, forced closures of existing businesses threatened to shut down the burgeoning industry. Backers of the initiative cited a rise in homelessness, a new, and unsavory reputation, and illicit homegrows. Cannabis naysayers argued the increased cost of medical and social services attributed to an influx of marijuana consumers, outweighed tax revenue. Voters ultimately rejected the 2016 proposal choosing to stay cautiously optimistic of a regulated recreational regime. Pueblo’s market remains second, only to Denver, and perfectly positioned for the outdoor market.

Meanwhile, California community, Nipton, prepares for buzzed bliss. American Green, Inc. recently purchased the entire town of Nipton, taking the label of cannabis-friendly municipality to the next level. Home to 20 permanent residents and 120 acres, plans to resurrect the gold rush rail town could redefine cannabis tourism. American Green hopes to create the “first energy-independent, cannabis-friendly hospitality destination”, beginning their venture by bottling CBD infused water from a local aquifer. American Green wants to create a “hub for the production of cannabis-based products”, in addition to pot-based tourism. Mixed reactions often cloud small towns looking to cannabis to stimulate their economy, however, Nipton appears to be a clean slate. With plans to invest another $2.5 million over the next 18 months, the pot-friendly outpost near the Nevada-California border will be a unique social experiment and approach to legalization and revitalization. It remains to be seen whether this weed-friendly resort will turn Nipton’s gold past, into a green future.

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