California Ready for End to Pot Prohibition

State officials are charting the regulatory and tax framework for a coming marijuana boom


President Franklin D. Roosevelt cheered the end of Prohibition in 1933 with these famous words: "What America needs now is a drink." Roosevelt and other federal officials had been expecting the demise of America's widely panned policy of banning the sale, transportation, production and importation of booze.

As various states put an end to the prohibition of marijuana, I've heard of no politicians extolling Americans to enjoy a good "toke" — but many are nevertheless plotting the regulatory and tax strategies for a post-legalization world. To many California officials, the issue is not whether to legalize recreational uses in a state that 19 years ago approved medical marijuana. It's about when change will happen and what the world is going to look like after it does.

The best example is the recent release of the wonkish 93-page "Pathways Report" from the state's Blue Ribbon Commission on Marijuana Policy. The panel was led by Lt. Gov. Gavin Newsom, a Democrat planning a run for governor in 2018. Following the report, he still supports legalization, although he says he is less of an advocate than he was — and Newsom won't support just any legalization initiative. His caution sets the tone for the current discussion.

Usually, "blue ribbon" commissions serve up tepid analysis. But the report was widely applauded for its candid effort to wrestle with the toughest issues. The report is the state's de facto blueprint for constructing a legal framework in anticipation of a 2016 statewide ballot expected to feature at least one serious legalization measure.

"It didn't come down with any decisive conclusions on any issues," said Dale Gieringer, director of California NORML (National Organization for the Reform of Marijuana Laws), and a backer of the Reform California coalition that is crafting one of the better-funded initiatives. "(The report) is thoughtful and well-informed. We're actually quite happy with it."

Blue-ribbon winners

Many conclusions are not only obvious — but designed to assuage the concerns of the public and law enforcement officials. The commission wants to ensure that children cannot easily gain access to marijuana, provide adequate testing of marijuana products to protect consumers, crack down on some of the environmental problems caused by illegal growing, and assure open and fair competition in the emerging weed industry.

Under the current mostly black-market situation, anyone has access to marijuana — and there's no outside observer who checks the products' potency or safety. Most environmental problems — the use of excessive pesticides and poisons, the waste of water resources, etc. — arise because these cultivation operations tend to be illegal and growers are more concerned about staying ahead of the law than about caring for the future of the property. Illegality also pushes growers onto public lands, which won't get confiscated if they get caught.

"Any move toward legalization is complicated by the fact that the federal government still lists marijuana as a Schedule 1 drug," according to the report. "Amid this federal prohibition, California has two current prongs of a marijuana industry: a) a large illicit market of cultivation and retail sale, and b) a quasi-legal medical cannabis system that is largely unregulated, untaxed and untenable."

As a result of this mishmash, the medical-pot situation invites recreational users to pretend they have medical conditions — and the "loose regulations … are also an invitation for federal intervention."

The report calls for a highly regulated recreational market with a tight state-licensing system; regulations to prevent the creation of a dominant marijuana industry; reasonable fees and taxes so a black market doesn't continue to thrive; limits on advertising; tracking of the product; government-directed testing; training requirements for marijuana industry personnel; a central state authority to regulate marijuana businesses; funding for myriad youth-protection programs; and more.

Newsom emphasizes the report's call for flexibility and a phased-in approach: "The biggest thing I've realized through this process is that legalization is not a decision that is made on Election Day, November next year. It's a process, it's sequenced," he said. "There's an implementation process that's critical."

In his view, Proposition 215, the 1996 measure that legalized medical marijuana, has resulted in a confusing and unsettled situation because similar regulatory groundwork wasn't done in advance of its passage.

Regulatory overreach?

The proposed regulatory regime is so extensive it makes some marijuana supporters wonder whether they might not be better off under the existing system. "I can make the case, if you can't toke up and celebrate in public when it passes, it's not legalization," said Steve Kubby, one of the drafters of Proposition 215, current chairman of a cannabis-related company and Libertarian Party activist.

Kubby was subsequently prosecuted for growing marijuana on his property — charges he claims were motivated by retribution for his active involvement in the campaign. He won his case, but his ordeal has left him jaded about reform efforts that give up too much in the process.

California marijuana users currently are in an overall better position now than those in Colorado and Washington — states that recently legalized recreational pot use, but did so in such a highly regulated and taxed way that it gave law enforcement many expanded powers, he argues. Legalization might "really be a step backwards."

Most marijuana activists interviewed for this article, however, are fine with a highly regulated approach. But they have vastly different ideas about what type of regulations they'd like to see — depending, of course, on what part of the industry they are involved in. Lobbyists for bigger growers want to use new rules to limit smaller mom-and-pop growers, whereas the small guys want limits on what they call Big Marijuana. There are disputes over local control.

Some marijuana activists are, for instance, supporting Assembly Bill 266, which for the first time since Proposition 215 creates a state-based regulatory model for medical-marijuana clinics. The bill gives marijuana sellers something — the first state licensing program and some legal certainty. It also creates a bureau or office of cannabis control, which will create some necessary regulatory infrastructure when recreational marijuana gets the voters' OK.

But to get the backing of local law enforcement and the powerful League of California Cities, it "gives cities full power and authority to enforce rules, regulations, and standards promulgated … for facilities that are issued a state license." Localities get the right to ban medical-marijuana clinics, which is "a strange and improper approach," according to George Mull, president of the California Cannabis Association.

"Unfortunately, most of the cities' response is if they can say 'no,' they will say 'no,'" Mull added. So in exchange for creating a model to allow medical-marijuana stores, it gives cities and counties the power to use zoning laws to shut them down.

And that sits well with some existing marijuana clinics, he argues, for potentially crass reasons: "Elements of the marijuana movement are in areas they already are permitted and feel safe. If there are less retail outlets available, they get more business.… It behooves them to keep licenses scarce."

In 2010, California voters rejected Proposition 19, a recreational legalization measure. One of the key problems was it created a patchwork of local laws, so that marijuana might be legal in San Francisco, but punishable as a felony in, say, neighboring Daly City. Police agencies and the chiefs' association seized on that flaw, said Diane Goldstein, a retired Redondo Beach police officer and spokesperson for Law Enforcement Against Prohibition, but now champion AB 266 because "they want a patchwork of laws so they can support bans in cities."

The city of San Diego offers a revealing take of what happens when local land-use rules supersede state-based protections. City officials have aggressively shut down 54 dispensaries in the past year and are working to shutter 15 others, according to a recent Union-Tribune article.

City Attorney Jan Goldsmith says it's "about the rule of law." His approach is to "aggressively enforce the law against those operating illegally while encouraging operators to work through the process to obtain a legal permit."

Critics note that when permits are tightly limited, it's hard to have an open and competitive market — and it keeps black markets thriving. One of the key rationales for marijuana legalization is to free up local resources to focus on more serious issues. But if code enforcers, city attorney offices and even police are focusing on shutting down clinics for land-use reasons, where's the time savings?

The tax man cometh

Police, local government officials and state regulators aren't the only ones to grapple with a coming world of legal marijuana. Some of the officials on the legalization cutting edge can be found among California's taxing authorities. That's not a surprise, given government has a financial interest in garnering revenue from state businesses. And because of an unsettled legal situation, the state only collects a small percentage of the marijuana cash it is owed.

Republican George Runner and Democrat Fiona Ma of the Board of Equalization, the state's tax-collection agency, created a Cannabis Compliance Pilot Project to help medical-marijuana businesses pay their taxes. Currently, they are hobbled by federal financial laws that forbid pot companies from having bank accounts. The BOE generally forbids cash payments — but is coming up with exceptions to help these businesses pay their taxes (without even having to state what industry they are involved in).

Sometimes, Runner says, marijuana business owners will come into a tax-agency office with plastic trash bags filled with cash. This cash situation, he said, is an invitation to violence and corruption. Runner is opposed to marijuana legalization, but "I've taken a position that it's important for us to set up a regulatory structure before there's an expansion … in case voters choose to do that."

Runner and Ma recently sponsored a "Bank the Cannabis Industry" conference in Sacramento to address banking concerns. There's also a bipartisan effort in Congress to allow legitimate marijuana businesses to have access to federally insured banks — but its fate is uncertain. The BOE wants to create a California-run bank to serve licensed marijuana businesses.

Not everyone on the BOE wants to simply work collaboratively with marijuana businesses to find solutions. BOE Chairman Jerome Horton, a Los Angeles Democrat, is focusing more on enforcement. He recently announced "his support for a 'Cannabis Tax Enforcement Eliot Ness Plan,' which is intended to educate, investigate, audit, arrest, and force cannabis sellers to pay their fair share of taxes."

He is backing an amnesty bill that offers growers a chance to come out from under the shadows "or risk imprisonment, as gangster Al Capone did for tax evasion."

In an interview, Horton agreed a majority of those in the medical-marijuana business are honest citizens. "We have to encourage those who are legitimate operators to comply, to fill out the permits and so forth and report and pay your taxes so we can distinguish between the ones who are not legitimate." But he said he is providing a stick along with the carrot.

Slow road from Prop. 215

State officials are still struggling with a framework for the normalization of medical-marijuana clinics 19 years after they became legal — and just as voters are moving on to wider legalization. One thing governments tend to be good at is collecting taxes. But California's government still hasn't sorted this out, even though grappling with the existing medical-marijuana structure is crucial to building any new recreational system.

Indeed, one of the complicating matters for the 2016 ballot is AB 266's fate. If it passes, initiative writers will need to see how these new rules for medical dispensaries might affect their ballot language.

One of the biggest questions raised by the Pathways report: Does the state follow Washington's model or Colorado's? Washington left its medical-marijuana business intact (although officials are clamping down on it) and then held a lottery system for new recreational businesses. But the high tax rate on the recreational stores created a continuing incentive for people to game the system and buy weed at dispensaries. High taxes also bolster the black market.

"The Colorado model makes sense for California," said Max Del Real, executive director of the California Cannabis Business League, a trade association that represents growers, distributors, laboratories and investors. "They took all the medical-marijuana businesses and essentially transitioned them into recreational commercial businesses."

Del Real says marijuana is a big business today that employs tens of thousands of people and works with local governments. He'd like to see backyard growers replaced by big growers who get cultivation licenses for commercial settings in urban environments — e.g., in 50,000-square-foot warehouses in industrial parks. He also backs strict numerical limits on pot shops and licenses, such as those in San Diego.

It's easy to see, however, why smaller operations are concerned about this approach. This is where the commission's report might have a blind spot. It wants to ensure "the industry and regulatory system are not dominated by large, corporate interests." But in advocating a tightly regulated market with lots of government controls and limits, the corporate entities that can afford lobbyists and lawyers are the ones most likely to get the approvals.

Driving into a roadblock

One of the thorniest roadblocks to legalization is the issue of drugged driving. Assemblyman Tom Lackey, a freshman Republican from Palmdale and former California Highway Patrol officer, authored a bill to allow cops to use an oral-fluids test (such as a mouth swab) designed to detect impaired driving. "We're sharing the roadway — including with those who are treating themselves medicinally," he said.

Lackey and the report agree on the need to combat drugged driving without arresting people who may have smoked earlier in the day, week or month. Unlike alcohol and chemical-based drugs, marijuana stays in one's system long after it causes impairment. The bill failed in committee mainly over concerns about false positives.

NORML's Gieringer says it's foolish to apply an alcohol-oriented testing system to this totally different substance. Driving safety has done nothing but improve since the passage of Proposition 215, he argues. People are smoking marijuana and driving now anyway. He doesn't believe legalizing marijuana would have any noticeable effect on drugged driving.

Even Lackey, a legalization foe, has backed AB 266 and was involved in the cannabis banking seminar, indicating the degree to which the debate in California has shifted from "if" to "when."

By contrast, marijuana legalization is still a topic for posturing or careful evasions among presidential candidates.

"If you're getting high in Colorado today, enjoy it. As of January 2017, I will enforce the federal laws," warned Republican presidential candidate and New Jersey Gov. Chris Christie.

Here in California, such rhetoric is rare. Instead, foes are quiet and legalization advocates are sorting through at least six different measures in the hopes of backing one that will pass statewide muster. There's a good chance California will soon join the legalized ranks of Alaska, Colorado, Oregon, Washington and the District of Columbia.

Fortunately, officials here aren't waiting for a vote before creating a legal and regulatory framework.