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Can Cannabis Interstate Commerce Be A Shortcut To Federal Legalization?

Updated: Dec 10, 2020




After an initial burst of celebration over last week’s House approval of the MORE Act, landmark legislation that would decriminalize marijuana at the federal level, the hard realization that getting the bill past the finish line and signed into law is an unlikely proposition is beginning to set in. Even some cannabis activists aren’t sure the bill is the right path to legalization, and getting the measure a fair hearing in the Senate while Mitch McConnell is at the reins isn’t at all likely.


With that reality in mind, a new group aimed at establishing a legal framework for cannabis interstate commerce was formed in September. Dubbed the Alliance for Sensible Markets, the group of activists and industry representatives has two primary goals. First, the group is working to bring two or more states with legal marijuana together to join in an interstate compact outlining the parameters for legal cannabis commerce between them.


Secondly, a path to federal approval of the plan would have to be determined and executed. Paired with a federal policy that would permit state-legal cannabis businesses to operate without interference, interstate cannabis commerce could be a more politically viable path to many of the goals of full legalization.


The Flaws Of A Fragmented Market


Adam Smith, the founder and president of the alliance, said in a telephone interview that the current system of regulated cannabis trade, with each state that has legalized pot operating its own siloed market of production, manufacturing, distribution, and sales, is unsustainable. And in the real world, it’s also a system that is unworkable.


"We've broken the laws of economics. We've said all states have to produce all of their products in-state, whether that's environmentally or economically reasonable,” says Smith. “And so, you end up with the best-producing regions on the planet that don't have markets to sell their product in, and giant consumer markets that can't get supply chains up and running to feed their demand. And it turns out that while the prohibition laws are easy to get around, the laws of supply and demand are pretty ironclad," leading to a vast market of illicit cannabis.


The current system requires states with climates favorable to outdoor cannabis cultivation such as California and Oregon to limit production to what can be sold domestically and forces states with less favorable conditions to grow the vast majority of the crop indoors inexpensive and sophisticated cultivation operations. As legalization comes to more of these cannabis consumer states, as Smith refers to them, hundreds of millions of dollars will be invested in indoor production facilities as supply slowly ramps up to meet demand. And when federal legalization finally is on the books, which seems inevitable at this point, interstate commerce rules will allow states to import and export pot.


“The minute federal legalization does happen, whether that's 2022 or '23 or '24, all of that is going to have to compete with flower and biomass coming from massive outdoor and greenhouse production on the West Coast. None of that is going to be competitive,” Smith says. “We are setting up systems that are doomed to fail when federal legalization happens.”


Cannabis Interstate Commerce To The Rescue


Instead of allowing that to happen, letting producer states enter into interstate cannabis commerce compacts would permit states like Oregon, which saw a glut of cannabis in 2018, to export some of their crop to consumer states such as New Jersey, where voters approved a recreational cannabis ballot measure last month, and New York, which could see legalization as soon as this year if sticking points including social equity provisions can be worked out by lawmakers.


“If you can allow markets to function, New York and New Jersey could get their industry up and running in 6 to 18 months, not three to five to seven years,” explains Smith. “We could move millions of people out of illicit markets years sooner if we allowed normal supply chains to happen, as the supply chains have always happened for cannabis. Cannabis has always come west to east.”


Legislative efforts to launch legal cannabis interstate commerce have already begun. Last year, Democratic Governor Kate Brown of Oregon signed legislation that would allow her state to enter cannabis trade pacts with other states, dependent on federal rules allowing such deals. The Alliance for Sensible Markets is now working to bring at least one consumer state on board. The opportunities such an arrangement would present small businesses could allow for states like New York to initiate meaningful social equity programs while bringing both businesses and consumers out of the unregulated market.


“With this one small change— allowing legal cannabis to go from one legal market to another across these invisible lines— suddenly, you have thousands of small businesses with access to thousands of the best suppliers in the country,” says Smith. “Now, you can build a retail presence that is differentiated. Now, you can build delivery and distribution that has choice, that can go get the best cannabis anywhere at the best prices, instead of everyone being beholden to a few large players.”


Federal Approval Needed


Once two states have authorized the creation of cannabis commerce pacts, the next step for the Alliance for Sensible Markets is to get the federal government to authorize such partnerships. Last year, House Democrat Representative Earl Blumenauer of Oregon introduced the State Cannabis Commerce Act, which would protect marijuana operations in legal states from federal interference and permit transfers from one to another. But Smith says that federal authorization could also come as a rider to a must-pass appropriations bill, making it more palatable to Republicans and moderate Democrats. Such a move would also sidestep the need to bring a more sweeping legalization bill such as the MORE Act to Joe Biden, who has indicated a reluctance to sign such a measure when he becomes president.


The Alliance for Sensible Markets has garnered support from notable groups including the Minority Cannabis Business Association, the Humboldt County Growers Alliance and the New York City Cannabis Industry Association, which has lobbied Governor Cuomo’s office to approve the creation of interstate compacts. If the group is successful in bringing at least one producer state and one consumer state together in a compact that gains federal approval, cannabis interstate commerce could be a shortcut to many of the goals of legalization without the political capital such legislation would require.


Smith notes that creating cannabis interstate compacts would be an economic win for both producer and consumer states, where hundreds of millions of dollars would be invested to build the infrastructure for production and retail distribution, respectively. The result would be tens of thousands of jobs at one of the most economically challenging times our nation has ever faced.


"Cannabis can be a real partner in economic recovery if you allow the market to function like markets are meant to work,” Smith insists.


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