As many observers will tell you, Connecticut has lagged behind many other states in legalizing the sale and use of recreational cannabis products. This might be one case where being late to the game can be useful because we can learn from the mistakes of others.
Throughout the United States, “the legalized marijuana industry is buckling under the strain of plunging prices, patchwork state regulation, and burdensome taxes,” according to a report published Monday in the Daily Mail, which cited a study issued earlier this month by the National Cannabis Industry Association (NCIA), a trade association.
The NCIA’s senior economist described the legal market as “on the verge of collapse if common sense, practical reforms are not enacted urgently.” As you can imagine, problems plaguing the industry vary from state to state because (laughably) on the federal level, cannabis remains a Schedule I narcotic on a par with heroin, LSD, and ecstasy. Meanwhile, alcohol, which kills far more people than all those drugs combined, is available virtually everywhere. And as we all know, it is consumed freely by lawmakers on Capitol Avenue in Hartford.
But even as the regulatory approaches of individual states vary, some common themes have emerged. The use of recreational cannabis, known in the trade as “adult use,” is now legal in 23 states. Last year, medical and recreational sales totaled $26 billion nationwide.
One of the problems is the lack of portability in the industry. Because interstate sales are banned by the federal government, excess product on the West Coast, where supplies are abundant, cannot be shipped to other states where retailers are experiencing shortages.
The NCIA also says that, in addition to downward pricing pressures and state and local tax burdens, some cannabis businesses are struggling because federal law prohibits them from deducting business expenses from corporate income taxes in the same way a standard business would.
State governments typically impose high taxes on legal marijuana. One of the tempting promises made to voters was that, in exchange for legalization, lawmakers would tax the hell out of the product, thereby providing badly needed new revenue streams to states and municipalities. But those taxes make legal cannabis less attractive and can drive buyers to the black market.
But it’s not just burdensome taxes. Excessive regulations can also hamper the legal market’s development. Take New York, where tight controls and a complicated licensing process have weakened the legitimate market. Critics say the initial rollout was botched. To give you an idea, as of July New York, which legalized in early 2021, had issued more than 200 licenses but only listed about 20 open dispensaries in a state of nearly 20 million people.
The New Jersey Cannabis Trade Association issued a statement last week complaining of being left behind by other states because of a “doom loop of slow licensing and weak regulatory enforcement” in the Garden State.
But perhaps most alarmingly, next door in Massachusetts, where the first adult-use store opened in November 2017 and where many Nutmeggers still do their cannabis shopping, prices have fallen, prompting the Boston Globe to thunder, “Dispensaries are closing. Is a great crash coming?” [paywall]
It’s a stoner’s market in the Bay State, say industry experts interviewed by the Globe. There are now more than 300 adult-use dispensaries in Massachusetts, with another 180 waiting in line to ask the Cannabis Control Commission for licenses. Several stores have closed. The mayor of Fall River was convicted two years ago in federal court of accepting bribes from cannabis vendors and defrauding investors to the tune of hundreds of thousands of dollars.
Unlike earlier in the Massachusetts legal pot era when supplies were tight, there is a surfeit of product but fewer customers than there were three years ago, in part because New York, New Jersey, and Connecticut have since legalized, so residents of those states no longer have to travel to Great Barrington or Northampton to shop for weed.
But the Globe also reports that the Massachusetts market woes are part of a broader trend, with national trade publications running dire headlines such as “Dispatches From the Failing Cannabis Economy” and “California Cannabis Operators in Peril as American Dream Turns to Nightmare.”
“Social equity” applicants – those from groups disproportionately harmed by the war on drugs – were slow to get started, often for lack of financing, thus giving larger companies a leg up in the business.
By comparison, Connecticut’s adult-use market is young. The first retail stores opened only about eight months ago. As of May, monthly sales have nearly doubled since the first store opened in January. However, during that time, prices have also dropped.
There are other possible warning signs. According to CT Inside Investigator, which is published by the libertarian-leaning Yankee Institute, as of April Connecticut’s adult-use prices at Curaleaf, a chain with stores in both states, were substantially higher than those in Massachusetts, with Connecticut tokers paying an average of $43.86 and Massachusetts buyers paying an average of $35.26 for the same product, a price difference of 24%. Only about 3 percentage points of the price variation were attributable to differences in taxes, CTII reported.
A spokesperson for the cannabis company told CTII the comparison isn’t “apples to apples” because Massachusetts is a “mature market.” In other words, expect prices to come down in Connecticut once the market here is better established. If that happens, tax revenues will wane proportionately.
Further complicating matters is that two senior officials in the state Department of Consumer Protection, which oversees Connecticut’s adult-use cannabis industry, left the department around the time of the rollout in January.
Commissioner Michelle Seagull announced her resignation only days after Andrea Comer, a DCP deputy commissioner and head of the state’s cannabis Social Equity Council, announced she would leave the agency at the end of the month to take a job as chief of staff to new state Treasurer Erick Russell. Seagull did not say where she was going.
The timing of their departures might be coincidence, but they hardly inspire confidence. And in terms of attracting investment, confidence is your friend and uncertainty is your enemy.
