New Laws Chart Course for Marijuana Legalization

How Colorado and Washington govern their legal pot markets will be a test case for the rest of the United States

By Eliza Gray Oct. 19, 2013

Nearly a year after Colorado and Washington voted to become the first states to legalize recreational marijuana, the detailed rules governing how pot will be grown, sold and taxed are finally complete. And as the two states implement their different approaches to getting high, the whole world is watching.

This week, the American Civil Liberties Union announced a new panel, headed by California Lt. Governor Gavin Newsom, to draft a possible 2016 ballot measure to legalize pot in the Golden State, where an earlier attempt failed in 2010. The panel will study the implementation of Washington and Colorado’s laws to see how they might serve as a model for California, according to member and ACLU attorney, Alison Holcomb. Lawmakers and academics from Uruguay, Brazil, Mexico, Chile, Canada and the United Kingdom have also expressed interest in learning from the states’ experiences.

Think of it as an A/B test for legal pot. While Colorado and Washington’s laws are based on a similar model  they both tax and tightly regulate legal markets for marijuana, require rigid security and third-party-laboratory testing, limit sale to people over 21 and the amount an adult can carry, prohibit out-of-state investment, and track marijuana closely from “seed-to-sale,” — there are important differences between the two approaches.

Washington has imposed a heavy 25% tax on each of the three parts of pot production: producer to processor, processor to retailer, and retailer to customer. Regulators say that will put the price of marijuana pre-tax at an average of $12 a gram, a price that the ACLU’s Holcomb says is competitive with illicit pot on the street. Colorado votes on its pot tax — a less onerous 15% excise tax and 10% sales tax, next month. Sam Kamin, a professor at the University of Denver who advised Colorado on its regulations and who will also be serving on the ACLU’s panel to devise a plan for California, says finding the “sweet spot” for taxation is key. “We want this to be self-funding regulation that is robust, but we don’t want the price of legal marijuana so much higher than the black market that it becomes attractive again.”

Unlike Colorado, Washington has imposed a cap on the total amount of marijuana that can be produced per year in the state. On the advice of UCLA professor Mark Kleiman, dubbed the “hemperor” because of his deep involvement in marijuana policy, regulators at the Liquor Control Board decided to cap the legal market at 80 metric tons — 40 for usable marijuana and 40 for other marijuana products. The chief rationale behind limiting annual production is to avoid “diversion” — when surplus legal pot is illegally smuggled to other states — says Brian Smith, a spokesman for the Washington State Liquor Board. Diversion is a major concern of federal authorities, and while Colorado has not imposed a cap, regulators say they might do so in the future if it is necessary.

Representatives from the marijuana industry differ on the merits of a cap. Stephen DeAngelo, president of the Arc View investment group, which focuses on marijuana investments, says caps are necessary because if there is too much marijuana flooding the system, retailers fight to keep prices down, which incentivizes them to cut corners on quality and safety measures like lab testing. Aaron Smith, executive director of the National Cannabis Industry Administration disagrees. “By limiting the legal market, they are enriching the illegal market,” Smith says.

Colorado and Washington will also license pot businesses differently. For the first few months of the new market, Colorado requires “vertical integration,” which means that every marijuana business must be involved in all parts of the business–growing, processing, and selling — to get a license. Brohl, the state’s regulator, says they did this because they thought it would initially limit the number of businesses, making it easier to control the new market. Starting this summer, Colorado will open the market to those interested in specialized roles. By contrast, Washington prohibits ”vertical integration” and instead only permits businesses to get licensed in one stage of production: growing, processing or selling. Washington’s intent, says Smith, the spokesman for Washington’s Liquor Control Board, was to avoid allowing monopolists to keep prices artificially high.

Washington’s regulations aren’t stricter on all fronts. Colorado has a stringent two-year minimum residency requirement for any owner or investor, while Washington has only a three-month requirement. These rules essentially prohibit out-of-state investment in the growth and production of marijuana (though they don’t bar investment in ancillary businesses, like, say, a phone app that offers a map of different providers). One reason for this, regulators and experts say, is to reassure the federal government that illegal drug money from across the country and around the world is not entering their legal marijuana markets. DeAngelo, who opposes the restrictions, says they might also stem from a fear of competition from growers from other states, particularly in Colorado where medical marijuana growers have already gained a foothold in the industry.

Kamin is hopeful that the evidence that comes out of Colorado and Washington will be able to help California devise its own plan for a regulated marijuana market by 2016. “We’ll have good data on what happens in Washington and Colorodo by then,” he says.

New Laws Chart Course for Marijuana Legalization