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September 10, 2013 4:46 PM What Should the Government Do About State-Legal Cannabis?

Mark Kleiman's statement to the Senate Judiciary Committee.

By Mark Kleiman

On August 26, Patrick Leahy, the chairman of the Senate Judiciary Committee, announced hearings on conflicts between federal and state marijuana laws and invited Attorney General Eric Holder to testify. Three days later, the Justice Department announced that even large for-profit cannabis firms operating under state law would not be priority targets for federal enforcement unless their operations trenched on eight specified federal priorities.

The hearing announced two weeks ago takes place this afternoon. The committee staff invited me to submit a written statement. (Full text after the jump.)

The statement makes five basic points:

—DoJ lacks the resources to enforce the marijuana laws without state and local help, so some form of accommodation was unavoidable.

—But DoJ could and should insist on a complete ban on marketing.

—Either formal agreements authorized by current law or policy waivers requiring new legislation could outperform informal guidance such as DoJ has issued.

—Bank regulators should allow businesses legal under state law to have access to normal banking services (checking accounts and credit-card processing) to avoid the robbery risks created by a large all-cash industry.

—A commercial market is not the only alternative, or the best alternative, to legalization. A for-profit cannabis industry will be devoted to creating bad habits, just like the existing alcohol, tobacco, and gambling industries. If Congress wants to preserve the option of a non-commercial system it needs to act now, before commercialization becomes entrenched.

September 10, 2013

Dear Mr. Chairman:

Thank you for the invitation to submit a statement of my views on conflicts between state and federal marijuana laws.

By way of introduction, I am a Professor of Public Policy at the UCLA Luskin School of Public Affairs. With Jonathan Caulkins, Angela Hawken, and Beau Kilmer, I wrote a book last year called Marijuana Legalization published by Oxford University Press. Kilmer and I jointly edit the Journal of Drug Policy Analysis.

In addition to my academic work, I provide advice on crime control and drug policy to governments in the United States and abroad through BOTEC Analysis Corporation. BOTEC has been advising the Washington State Liquor Control Board on the implementation of a regulated market for cannabis.

The opinions here expressed are entirely my responsibility, and should not be taken to reflect the views of UCLA, of the State of Washington, or of my co-authors.

The Nature of the Conflict and the Case for Accommodation

The combination of the Controlled Substances Act and state-level legalization creates a conflict: the states are licensing individuals and firms to commit federal felonies. The question is how the federal government should deal with that conflict. Neither of the obvious answers to that question - simple acquiescence nor a complete crackdown - is either workable or consistent with the requirements of the CSA itself.

It is undisputed that the states could repeal their marijuana laws entirely - as New York State did with alcohol in 1923 - leaving the federal government with an impossible task: 4000 DEA agents can’t replace 500,000 state and local police.

It would clearly be more desirable, in terms of controlling drug abuse - which, after all, is the purpose of the CSA - for the states to tax and regulate than for them to declare a free-for-all. To make those taxes and regulations effective, the states will have to maintain or even increase enforcement against the remaining illicit market. It has proven impossible to eliminate cannabis use and sales entirely, because arresting a grower or dealer creates a market niche for another grower or dealer. It should not be impossible, once a state allows a reliable competing state-licensed source of supply, to drive most of the purely illicit market out of business, just as the legal alcohol industry has largely eliminated moonshining.

Therefore it makes sense for the federal government to work with the states - as the CSA requires - rather than against them, even when the states decide to regulate and tax cannabis rather than continuing to prohibit it. That does not change the illegal status of the activity under federal law. But it does hold out hope of preventing these two local experiments from becoming national problems.

Indeed, the federal government could easily destroy the licensed, taxed, and regulated systems Colorado and Washington are now putting into place. But that would not mean that no one in those states would produce, sell, or consume marijuana: it would merely leave production and sale in the hands of unlicensed, untaxed, and unregulated illicit and quasi-medical producers and distributors. Would that really be a better result than is likely to emerge if the state-level experiments are allowed to run their course?

On the other hand, simple deference to the states seems equally unwise. The CSA remains the law of the land, and other states have a right to expect the federal government to ensure that decisions made in Washington and Colorado do not lead to a national flood of cheap, high-potency cannabis.

The DoJ announcement of August 29 seems to me a serious and well-considered effort to deal with a situation without any easy solutions.

Alternative Approaches: Sec. 873 Contractual Agreements and Waivers

Still, the uncertainties and ambiguities created by the conflict of laws represent undeniable problems. In a recently published paper, “Cooperative Enforcement Agreements and Policy Waivers: New Options for Federal Accommodation to State-Level Cannabis Legalization,” (Journal of Drug Policy Analysis. Volume 6, Issue 1, August 2013) I attempt to lay out two alternatives.

One, which could have been done - or could still be done - within the confines of the current law, would be for the federal government and the legalizing states to enter into “contractual agreements” as provided for in Section 873 of the CSA. That section gives the Attorney General the power to make such agreements “notwithstanding any other provision of law.” In the negotiations leading up to such agreements, the Justice Department could and should require specific, verifiable commitments from Colorado and Washington with respect both to the controls to be placed on the state-legal markets and the efforts to be undertaken with respect to the frankly illicit markets. In my view, the risks of interstate smuggling from purely illegal activity, and from the unregulated and unregistered production for personal use allowed under the Colorado law and under Washington’s medical marijuana law, are more substantial than the risks of diversion from licensed producers.

A second alternative - requiring new legislation - would be to create a formal “waiver” process under which states would be allowed to experiment with taxed and regulated cannabis production and distribution, as states were allowed to experiment with alternative forms of income support under AFDC waivers. The waiver process could be made as strict as Congress desired. With a waiver in place, state-legal activity would become legal under federal law as well, a substantial improvement, for state regulators and industry participants alike, over simply being a low enforcement priority. That promise would provide a substantial incentive for states seeking waivers, or wanting to hold on to waivers, once granted, to do their utmost to prevent sales out of state. That would also create an incentive for the newly-legal industries to self-police and to support enforcement efforts against rogue licensees and entirely illicit traffickers, since the threat of having a waiver withdrawn as the result of misbehavior by a few bad actors or the state’s failure to rein in the illicit market would be a potent one.

The goals established, either under contractual agreements or under waivers, would have to be realistic. Even under existing laws, we have notably failed to prevent the distribution of cannabis to minors, just as age restrictions have not prevented a major alcohol-abuse problem among people under 21. A rule that required states to promise that no cannabis from licensed sellers ever find its way into the hands of minors would be a demand for the Moon. However setting reasonable goals and requiring sensible policies about, for example, labeling, marketing, and child-resistant or child-aversive packaging, could produce reasonable results.

Commercialization is Not the Only Option

The voters in Colorado and Washington State have created “alcohol-like” cannabis industries: competing for-profit firms acting under state regulation. There is reason to doubt that such a system is anywhere close to the ideal one. Whether the drug involved is cannabis or alcohol, commercial vendors have interests directly opposed to the public interest, because their most reliable and lucrative customers are precisely the minority of cannabis users or drinkers who have lost control over their consumption. The public interest is in allowing adult access to intoxicants for those who will use them moderately and responsibly. The commercial interest is in maximizing revenues and profit, which means creating and serving a market of people with substance abuse problems. The ability of regulators to rein in market excesses is limited by the Supreme Court’s “commercial free speech” jurisprudence. In what seems (to a non-lawyer) a complete absurdity, the Court has held that Congress or a state legislature may ban an activity entirely, but may not allow it while banning its promotion.

There are at least two alternatives to commercial availability, short of complete prohibition. One would be to create a state monopoly on retail sales, as used to be the policy toward alcohol in many states. The other would be to allow production and sale on a strictly not-for-profit basis, exemplified by the Spanish “cannabis clubs” where users band together to hire people to produce cannabis for them, on the model of a consumer-owned organic farm. Neither of those approaches is simple or without its own problems, but either would dampen what will otherwise be the enthusiastic efforts of state-licensed cannabis vendors to create bad habits. A “state-store” system could both limit its own marketing and require its suppliers to limit theirs as a contractual matter. (There is no guarantee that a state monopoly system would avoid relentless promotion; consider the excesses of the state lottery system, But the federal government could insist on such restraint as the price of a waiver.)

While the Controlled Substances Act in its current form remains in place, the “state-store” system is not an option, because no state can instruct its officials to violate the federal law, as selling cannabis clearly does. (Regulating the behavior of private parties, even when that behavior violates the federal law, does not create the same problem.) Production and sales activity under a waiver of the kind proposed would be legal, rather than merely tolerated, eliminating the legal problem. Thus a “waivers” approach could allow a state monopoly on sales.

In creating authority for cannabis policy waivers, the Congress could even require either state-monopoly sales or an entirely not-for-profit industry. Or it could choose to give the Executive Branch, and the states, more leeway. But without new legislation the Federal response will necessarily continue to be purely reactive, and without substantial legislative input. Surely it would be better for the Congress to take an active role, lest the country wind up stuck with the commercial-sales model simply because that was the choice of the first two states to attempt cannabis regulation.

Discouraging Marketing

Even under the prosecutorial-discretion approach adopted by the Justice Department, there are opportunities for discouraging marketing activity which the memo issued last month does not fully exploit. A retailer needs a modest sign on the outside of the building and a website listing what it has to sell. There is no need to tolerate anything more than that: billboards, flyers, newspaper/television/radio advertising, “social marketing.” The Justice Department could, and I submit should, add marketing efforts to the list of eight categories of activity that will attract enforcement and prosecution. That would do more to prevent increased drug abuse and increased use by minors than any single other step the Federal government could take.

Both in Washington State and in Colorado, there are two major categories of risk: the risk of increased drug abuse and its consequences within the state, and the risk of exports to other states worsening drug abuse problems there. In each case price is a key consideration. If prices in the licit market are so much higher than illicit prices that they help keep the black market in business, it will frustrate the goal the voters had in mind. But there is no good reason to allow licit-market prices to fall much below current illicit-market or medical-market prices. (In Colorado especially, some of the reported medical-market prices are already at dangerously low levels, and they are likely to fall - even taking taxation into account - when producers are able to enjoy the efficiencies that go with open rather than covert production.) For a non-habituated user, cannabis intoxication is already available at a price of less than a dollar per hour. Paraphrasing an old ad for a premium Scotch, “If the price bothers you, you’re toking too much.” It should be an explicit goal of state and federal policy to prevent any further decrease in price. Both Washington and Colorado use ad valorem taxes, which will fall along with market prices. A better approach would be a specific excise based on the quantity of THC, and rising as market prices fall.

The Financial-Services Issue

Federal responsibility does not begin and end with the Department of Justice. Treasury Department (and Federal Reserve Board) regulations, and the guidance provided to financial institutions by their regulators and inspectors from the Fed, the Comptroller’s office, the Federal Deposit Insurance Corporation, and the National Credit Union Administration currently mean that in practice the entire state-legal medical marijuana industry, and the new state-legal commercial cannabis industries in Washington and Colorado, have to operate almost entirely in cash - without being able either to accept credit cards or to have checking accounts - unless they conceal their identity from their financial institutions by calling themselves “flower shops” or “natural products suppliers” or “herbalists” or some such, or maintaining what are in fact business accounts under personal names. Even those prepared to engage in such subreption face the constant risk of having their accounts terminated.

Once Washington and Colorado have their commercial systems up and running, those regulatory practices, if not changed, will mean hundreds of millions of dollars per year in cash transactions, with attendant risks of robbery. That risk to public safety seems to me unnecessary and unaccompanied by any good result. I would suggest that the Committee, having asked the Justice Department what it plans to do and gotten the August 29 memo as an answer, now ask the Treasury Department whether it plans to offer new guidance to the bank regulators, or whether it believes that new legislation is needed. This matter deserves, I submit, more attention than it has received heretofore.

The States as Laboratories

Now, as to the longer term:

I have been a long-time skeptic about proposals for cannabis legalization. But the changes in public opinion, and in market behavior, over the past decade now make me doubt that there is a operationally and politically sustainable version of cannabis prohibition still available. It seems to me that the burden of the argument now falls on those who wish to retain the legal status quo. What specific policies would they put in place, and what resources would they be willing to provide, that could realistically be expected to shrink what is now a $30 billion-per-year illicit market? If they have no more idea than I do how to accomplish that, then it is time to ask whether whatever benefits we get from continued cannabis prohibition in the form of reduced drug abuse are really large enough to justify offering criminal organizations such a huge economic prize.

The answer to that question depends in part on whether the states and the federal government can design and implement effective systems of taxation and regulation to replace the cannabis provisions of the CSA and of the corresponding state laws. Right now, no one knows. The Colorado and Washington experiments will provide substantial help in finding some answers. (Since those data will not collect themselves federal and philanthropic research-funding agencies should be ready to take advantage of the opportunity to learn from experience.) That - along with the sheer impossibility of enforcing federal law without state and local help - seems to me the best argument for accommodating to the Washington and Colorado initiatives rather than merely clamping down hard.

Very truly yours,

Mark A.R. Kleiman

[Cross-posted at The Reality-Based Community]

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Mark Kleiman is a professor of public policy at the University of California Los Angeles.

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