Opinion: Illinois' Bill To Legalize Cannabis Will Create A Failing Market

By Jonathan Loiterman.

The public debate surrounding cannabis policy often focuses on the fundamental question of legalization, but the details of how cannabis policy is implemented are critical to understanding and forecasting legalization’s social and financial impact. Well intended, pro-legalization advocates should not be lured by bad policy. Important details about things like licensing, canopy-sizes, and rules governing competition will have a huge social and financial impact in the short term and erect enduring economic structures that will be extraordinarily difficult to disrupt decades into the future.

After historic votes to approve the Illinois Cannabis Regulation and Tax Act (HB 1438) in the Illinois House and Senate, Illinois Governor J.B. Pritzker has pledged to sign the bill into law. Unfortunately, the law is terrible for almost everyone in Illinois. The law will, by design, allocate nearly all the economic benefit of legalization to a tiny group of pre-selected political and economic elites, shrouded in a legal cloak of secrecy, who received medical licenses in 2015. It will also fail to achieve its criminal and social justice goals.

The structure of the law is so prone to abuse that at least one politician was already already under investigation for attempts to sell access to the licenses before the bill has passed.

In 2015, Illinois awarded, by statute, 20 cultivation licenses as part of a pilot medical program. Close to 200 applicants filed for those 20 licenses, but just two companies were awarded nearly a third of the licenses and about a dozen wound up controlling all of them in a process that was entirely opaque.

This new law provides that those legacy licensees will have access to a class of license (a “cultivation center”) for which no one else in the public may ever be able to apply. Cultivation centers may have up to 210,000 square feet of grow canopy each, and owners of cultivation centers may have an interest in up to 3 such licenses. Total available production of these licenses: 4,200,000 square feet.

The only new cultivation licenses that will be available are those for “craft growers,” who will be initially limited to just 5,000 square feet of canopy and an interest in only one such license. This law would only initially allow 40 such growers by 2020, who would collectively control just 200,000 square feet of total production capacity with another 60 available by 2021, a total of 500,000 square feet for all of them put together.

The law mandates that each legacy medical license will control more production capacity than all of the newly licensed growers combined. Some individual companies will own up to three times all the new production capacity authorized by this law. As a group, the 2015 cultivator licensee cohort would start off controlling more than 95% of the supply of cannabis for all downstream licensees through at least 2021, with any further licensing up to the discretion of the same agencies who awarded these cultivation centers this unearned dominance in the first place. That dominance could never be disrupted by free market forces since the craft growers are legally prohibited from expanding capacity beyond certain strict limits applicable only to the new growers.

This means that adjacent businesses that supply equipment, real estate, soil, lumber, professional services, and other needs for cannabis businesses will all suffer from restricted competition and scale in the market and that citizens and businesses in Illinois will be cheated out of the economic stimulus that would have been triggered by those investments.

These supply conditions are extraordinarily likely to lead to high prices. Cannabis Benchmarks shows that Illinois already has among the highest cannabis prices in the U.S. for similar reasons. High cannabis prices are significant for every citizen in Illinois for one simple reason: when prices for cannabis are too high in legal, regulated markets, consumers stick to the illegal markets.

California is facing a 50% shortfall in cannabis tax revenue because high taxes and high regulation have priced too many consumers out of the market. By comparison, Oregon, which started its adult use cannabis program with an open licensing system, is beating tax revenue targets by a significant margin. In fact, cannabis is leading the way on a tax revenue boom that is so great, it triggered a constitutional provision that requires up to .4 billion to be returned to citizens.