July | August 2017

By Carrie Abner, CSG Managing Editor
Anecdotally, it’s been a top cash crop in a number of states for decades. But with the opening of recreational marijuana sales in Colorado and Washington, states are just now beginning to understand the full financial impact of cannabis to government coffers.
As more states look to add marijuana and its cannabis cousin, industrial hemp, to their agricultural industries, the costs and benefits are becoming clearer.
The Challenge of Being First
Colorado marked the first year of recreational marijuana sales in January. According to Lewis Koski, director of the state’s Marijuana Enforcement Division, aggregate marijuana tax revenues totaled $63.4 million for 2014, but he says it’s too early to predict what this means for marijuana revenues in the future.
“Even from a government perspective, we need to wait longer until we get more historical data before we start analyzing what the financial impact is going to be,” he said.Coloradans voted to approve Amendment 64, legalizing recreational marijuana, in November 2012. Just two months later, the state’s general assembly created the statutory framework for the program and a full set of regulations was in place by July 2013. The state began accepting applications for retail licenses in October and the first stores opened Jan. 1, 2014.
“The timeframe for us to get everything implemented was very, very tight,” said Koski. “There were some real challenges that came along with getting people hired, in getting rules promulgated, getting forms produced … just to get ready for each one of these very tight deadlines.”
Koski said one of the advantages that made it possible for the state to meet such a tight rollout schedule was that Colorado already had and was regulating a medical marijuana industry. Initially, only licensed medical marijuana dispensaries were allowed to apply for a license for the new retail market.
That’s not the case in Washington state, which opened its own recreational marijuana market in July 2014.
Unlike Colorado, the medical marijuana industry in Washington is largely unregulated. The state decided not to allow medical dispensaries to apply for a retail license, which meant it had to organize and license a whole new group of cultivators to supply the market. According to Rick Garza, director of the Washington State Liquor Control Board, which regulates the state’s recreational marijuana market, it meant the process took a little longer to implement, but he said it has resulted in a safer industry for the state.
“We have been maybe criticized for being slow in opening up our marketplace,” said Garza. “We’re really comfortable with the speed with which we’re moving.”
Garza said the state had reached $120 million in sales of recreational pot as of March 2015, with nearly $30 million in revenue generated for the fiscal year so far. Considering the first fiscal year forecast of $34 million in anticipated revenue, he is optimistic about the future of the industry.
“It looks like we’re going to exceed, at least in revenue, the forecast of how much we would generate the first year,” Garza said. “It’s been healthy.”
Navigating the Legal Waters
One of the challenges facing both Colorado and Washington was establishing a marketplace for a product that is illegal at the federal level. Concerns over federal law meant partner agencies were reluctant to get involved.
“Whether as an agency or outside the state (government), there were people in the state who were very leery at first, concerned about doing anything that might jeopardize federal funds or jeopardize relationships with federal government,” Garza said.
A memorandum from the Deputy U.S. Attorney General James Cole in August 2013 outlined the priority enforcement issues of the U.S. Department of Justice in light of marijuana legalization in Colorado and Washington, including distribution to minors and diversion of products to neighboring states.
As a result, preventing the overproduction of marijuana and diversion of the product across state lines became one of several priorities for the two states. Officials in both states commissioned studies to determine the potential demand for pot and set production caps for growers. But it’s an evolving process, both Garza and Koski admit.
Colorado’s marijuana cultivation is tracked from seed to sale using Radio Frequency Identification, or RFID, technology. Koski said regulators will reassess production caps with new data from the system this summer.
But despite its efforts, Colorado’s ability to prevent the diversion of marijuana products across state lines is being questioned in a lawsuit filed in December by attorneys general in Nebraska and Oklahoma. The case is currently before the U.S. Supreme Court.
A Comeback for Hemp?
Marijuana isn’t the only crop facing federal legal obstacles. Industrial hemp is a genetically distinct variety of cannabis with less than .3 percent THC, the active high-producing ingredient in marijuana. While hemp products are legal for trade in the United States, the Controlled Substances Act bans the cultivation of industrial hemp without a permit from the Drug Enforcement Agency.
According to Eric Steenstra, president of Vote Hemp—an advocacy organization that supports hemp legalization—22 states have passed legislation authorizing the cultivation of hemp for research or commercial purposes and another 19 states are considering such bills.
“Farmers are always looking for new crops that they can potentially make money on,” said Steenstra. “Hemp is a crop that we know grows well in the United States and has a history going back to the founding fathers of the country and before, even, to colonial times.”
A provision in last year’s federal farm bill allowed states to roll out hemp cultivation pilot projects by universities and departments of agriculture. Three states—Colorado, Kentucky and Vermont—have projects underway, while Hawaii, North Dakota and Oregon are in the process of rolling out projects.
But the process hasn’t been without issue. In 2014, the Drug Enforcement Agency seized 250 pounds of hemp seeds shipped from Italy to the University of Kentucky for its authorized research project. The seeds were released by the DEA a week later, after the state filed a lawsuit.