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Western states such as California and Oregon are overflowing with cannabis, a supply glut that is driving down prices and sparking pleas for federal permission to sell marijuana across state lines.
Pot users in New Jersey are facing the inverse. Consumers are confronting high prices, and trade groups accuse the state of slow-walking licenses that could increase the number of cannabis operators supplying the legal market.
A trade group said Colorado had its worst April sales period in five years. The month is associated with big cannabis sales.
The legal marijuana industry is experiencing growing pains from coast to coast as legalization in nearly two dozen states fuels rapid expansion.
Industry representatives point to general economic stressors, including inflation and soaring interest rates. Venture funding is down, and demand for marijuana has eased since pandemic restrictions trapped people at home.
“There’s definitely significant headwinds across the board, and part of that is there is oversupply in Western states,” said Aaron Smith, co-founder and CEO of the National Cannabis Industry Association. “The industry is really overregulated, overtaxed — we know that — and we’re competing against an existing underground market that has been thriving for decades.”
Turbulence in the cannabis industry is sparking calls for the federal government to allow interstate commerce and improve access to banking services. Others say legal marijuana is a failed experiment and doesn’t need a bailout from state capitals or Washington.
“I don’t think people who are in violation of federal law deserve any kind of congressional relief. That would be like saying we should give relief to those engaging in prostitution businesses in Las Vegas,” said Luke Niforatos, executive vice president at Smart Approaches to Marijuana.
In 2012, Colorado and Washington became the first states to legalize recreational marijuana. Since then, 21 other states and the District of Columbia have joined them, though states have varying rules and approaches to sales. Minnesota, the latest to join the fold, launched its program this summer.
Much of the angst around legalization centered on the potential harm from high levels of THC, the active ingredient in cannabis, and fears about more drug-influenced driving and accidents.
Now, the hand-wringing is over the economics underpinning the sector after explosive growth.
“Go-go investment in business expansion, with a goal of capturing market share, has given way to a focus on bottom-line sustainability — and to bringing payroll costs in line with actual revenue. Call it the great cannabis reset,” Vangst, a cannabis jobs platform, said in its 2023 report.
The marijuana sector supported 417,493 full-time equivalent jobs early this year, down 2% from 2022, according to Vangst.
“After nearly a decade of unbroken double-digit job growth, the cannabis industry collectively pressed pause on new hiring in 2022,” the report said.
Legal marijuana advocates say a small cabal of operators in New Jersey is keeping prices artificially high because of low competition.
The New Jersey Cannabis Trade Association released a memo late last month saying more than 700 applications to operate cannabis businesses are “still pending, leaving aspiring cannabis entrepreneurs unable to open their operations.”
“Consequently, potential tax revenue that would greatly benefit the state is lost as it continues to flow through the illicit market,” the association said.
The New Jersey Cannabis Regulatory Commission says individual businesses, including trade association members, set the prices and everyone should work together.
“We hope their membership heeds their own call to action. High prices keep consumers out of the legal market and keep tax revenue low,” said Jeff Brown, executive director of the commission. “New Jersey can be the premier cannabis market on the East Coast. The NJ-CRC looks forward to working with the NJCTA, and all stakeholders, to make that a reality.”
Terrific growing conditions along the West Coast have created marijuana surpluses that federal law traps inside state borders. States would like to send excess supply to legal programs in other states. Meanwhile, prices and profits dwindle.
The Associated Press reported this year that “it’s an open secret some licensed growers have funneled product to the out-of-state black market just to stay afloat.”
Industry players said they hope the growing appetite for legalizing marijuana comes with a federal desire to let states shuffle their products around the country.
“When we’re talking about reforms, interstate commerce is vitally needed,” Mr. Smith said. “Just talking about prices being too high in New Jersey and the Eastern states and too low in the Western states — clearly, there’s a solution to that.”
Morgan Fox, political director of the National Organization for the Reform of Marijuana Laws, or NORML, said more states are authorizing recreational marijuana, but the industry wants congressional action.
“One of the biggest complaints that any cannabis business has, particularly smaller and midsize businesses, is lack of access to capital. And this is almost entirely due to the fact that banks are discouraged from working with cannabis businesses because of outdated federal laws,” Mr. Fox said. “Even if you are able to find a bank that is willing to work with you, oftentimes they charge exorbitant prices in order to provide those services much beyond what other businesses have to deal with.”
Senators in both parties are championing a bill that would give the cannabis industry access to banking without fear of penalties or high fees. They say financial rules must adjust with marijuana laws so businesses are treated equally and workers are no longer paid in cash and exposed to robbery.
The SAFE Banking Act would prohibit federal bank regulators from penalizing financial services to legitimate state-sanctioned and regulated cannabis businesses. It would also stop regulators from terminating a bank’s federal deposit insurance solely because it provides services to state-sanctioned cannabis or associated businesses.
The Senate Banking Committee held a hearing on the bill in May, and advocates hope for a markup soon.
The Marijuana Industry Group said red tape and the lack of cooperation from banks are driving cannabis job losses in Colorado. Mastercard said this year that account holders could not use its debit cards at dispensaries.
“Year-over-year increases in regulations and taxes continue to drive business costs up, while inflation, purchase limits and a lack of merchant processing make it more difficult for patients and consumers to access cannabis, which drives them to the illicit market,” said Marijuana Industry Group Executive Director Truman Bradley.
Senate Majority Leader Charles E. Schumer, New York Democrat, included “safeguarding cannabis banking” on his to-do list for the fall work period in a memo to colleagues, raising the likelihood that the SAFE Banking Act will advance.
Late last month, the Biden administration told the Drug Enforcement Administration that it should move marijuana from the Schedule I list of drugs with high risk of abuse to Schedule III, a less-restrictive classification. If accepted by the DEA, the move would not open the door to interstate sales but would allow cannabis operators to deduct business expenses and save money during a challenging time for the industry.
During a recent appearance on Newsmax, Rep. Matt Gaetz, Florida Republican, said, “Perhaps the worst decision made by the U.S. government in 1970 was to begin the war on drugs through the Controlled Substances Act.”
For years, cannabis businesses have complained that listing marijuana as a Schedule I drug subjects them to Section 280E tax provisions that prevent them from taking traditional deductions for business expenses.
The lack of banking access and tax restrictions create “a situation where businesses are forced to charge very high prices in order to be able to stay solvent,” Mr. Fox said. “And that makes it much more difficult for them to compete with the unregulated market.”
Organizations that oppose the rush toward lax marijuana laws say it is time to reflect on whether the industry is good for Americans rather than bail it out.
“It’s very clear this experiment has failed,” Mr. Niforatos said. “The black market is beating the legal market everywhere.”
Mr. Niforatos said Mr. Schumer might be championing the safe-banking measure but the Republican-led House won’t prioritize it. He also pointed to voters in Oklahoma, Arkansas, North Dakota and South Dakota who rejected legalization measures.
Marijuana industry advocates say the march toward legalization is here to stay so lawmakers should help them weather a rocky period. More than two-thirds of Americans, 68%, told Gallup last fall that marijuana should be legal, up from 12% when the pollsters started asking about it in 1969.
“We’ve gotten to a point where it’s less about, you know, the opposition coming in with their doom-and-gloom predictions of what the industry is going to do,” Mr. Smith said. “It’s more about addressing general congressional dysfunction and the end of political divisiveness. That’s impacting every issue in America.”
• Tom Howell Jr. can be reached at thowell@washingtontimes.com.
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