Governor’s Cannabis Advisory Commission Report a Mixed Bag

Shortly after he vetoed the first-in-the-nation cannabis legalization bill in May 2017, Governor Phil Scott created a “Marijuana Advisory Commission” to examine potential policy choices for regulating Vermont’s lucrative underground commercial market – estimated to be as large as $225 million per year. Gov. Scott subsequently appointed a slew of officials to this commission, several of whom had been openly hostile to legalization in the past, leading advocates to worry whether this commission was meant to succeed or to fail. 

Since then, the commission and its various sub-committees have held multiple meetings to discuss issues such as road safety, drug abuse prevention, tax structures, and the Vermont State Police’s perennial request for THC spit tests that don’t actually measure impairment, but which might be able to tell us that someone may have consumed cannabis at some point in the past few weeks (unless it’s a false positive, that is). 

A democratized licensing system is crucial for the success of any regulated market in Vermont, where cannabis consumers are currently served by many small growers who should be welcomed into this new economy, rather than left to continue supplying the illicit market.

Given the cause for worry, I was frankly relieved to read the draft report issued by the Commission’s Subcommittee on Taxation and Regulation, a decidedly mixed bag of good and not-so-good ideas, but much better than the worst-case scenario.

First among the good proposals in the draft report is the call for issuing an unlimited number of small-scale, low-cost cultivation licenses, similar to the 2017 regulation bill proposed by Northeast Kingdom State Representative Sam Young (H.490).

In Rep. Young’s bill, the state would have issued an unlimited number of licenses authorizing 500 square feet of outdoor plant canopy for $500 per year (or $1,500 for a similarly-sized but more lucrative indoor operation). Such a democratized licensing system is crucial for the success of any regulated market in Vermont, where cannabis consumers are currently served by many small growers who should be welcomed into this new economy, rather than left to continue supplying the illicit market. Further, as a matter of fundamental fairness, the small local businessmen and women who’ve safely supplied Vermont’s cannabis market for decades should be first in line to reap the benefits of legalization.

Unfortunately, on one very important topic – how to effectively tax the new cannabis market – the subcommittee seems intent on getting things wrong, recommending a 26%-27% tax on retail sales of cannabis. 

The subcommittee also deserves credit for recommending sharp limits on inherently anti-consumer horizontal monopolies. And the report also recommends smart controls on edible products, such as requiring a universal THC symbol on all products, informative labeling, standardized single-dose serving sizes, and regulations similar to Colorado’s ban on certain THC-infused candies that are especially appealing to children who might otherwise unwittingly consume them. Importantly, the subcommittee recommended an outright ban on selling THC in combination with alcohol or nicotine, two far more addictive and harmful substances. Careful readers will note that each of these proposals was reflected in Rep. Young’s 2017 bill.

Unfortunately, on one very important topic – how to effectively tax the new cannabis market – the subcommittee seems intent on getting things wrong, recommending a 26%-27% tax on retail sales of cannabis. 

Most observers so far have focused on the fact that this proposed rate is much higher than what is levied in Massachusetts, worrying that this rate will render the regulated market uncompetitive with the parallel illicit market.  I have a rather contrarian view of the situation: while a 27% tax rate may indeed be too high at the initial launch of regulated sales, within 6 to 12 months it will be too low.

The report seems to acknowledge the weakness of its price-based, retail-only tax proposal, noting that “the prices of legal [cannabis] products dropped precipitously in the first few years of legalized [cannabis] sales in other states,” and producing a revenue estimate far below those in previous non-partisan reports.

As I previously explained in a 2017 commentary, a key feature of legal cannabis markets is that once you take away the risk of arrest and allow a sufficient supply into the market, consumer prices fall, and sharply.  In Oregon, for example, legal cannabis fetches a mere $400 per pound on the wholesale market (compared to $300-$350 per ounce at Vermont’s medical marijuana dispensaries), a 75% drop from the roughly $2,000/pound growers were paid at the dawn of legalization.  Even in Colorado, where production is more limited, prices have dropped by 63% in just three years.

The report seems to acknowledge the weakness of its price-based, retail-only tax proposal, noting that “the prices of legal [cannabis] products dropped precipitously in the first few years of legalized [cannabis] sales in other states,” and producing a revenue estimate far below those in previous non-partisan reports.

The subcommittee report dispenses with these superior tax structures in a stunningly terse single paragraph, preferring to tax by price alone “for the sake of administrative effectiveness and efficiency.” 

What alternatives are available? Many! In Alaska, marijuana is taxed by weight instead of price (an ounce will weigh an ounce whether it sells for $100 or $350 – but the tax is $50 either way). Colorado combines a retail excise tax with a weight-based wholesale tax. Several local jurisdictions in California simply tax cultivators by the size of their plant canopy. And H.490 would have combined a flexible wholesale-level tax that automatically adjusted to market conditions with a retail tax that featured a by-weight minimum to guard against revenue shortfalls when history repeats itself and prices drop.

The subcommittee report dispenses with these superior tax structures in a stunningly terse single paragraph, preferring to tax by price alone “for the sake of administrative effectiveness and efficiency.” 

Read that again: the Governor’s hand-picked task force wants to knowingly implement a policy which is defective by design simply because any alternative would require the Vermont Department of Taxes to work a little bit harder than they’d like to.

Vermonters deserve better than this. For the past four years, we’ve heard repeatedly from both Candidate Scott and Governor Scott that we need to wait a little longer, learn from Colorado’s, Washington’s, and Oregon’s experience, and apply those lessons towards avoiding those states’ early mistakes. But as the rubber hits the road, it seems that the Scott Administration is keen to repeat those mistakes instead.

Dave Silberman is an attorney and pro bono legalization advocate in Middlebury.  This column does not represent the views of any client.  You can find him on Twitter at @DaveSilberman.