Lessons learned from Washington state marijuana laws after schedule change

With marijuana reclassification likely to happen within the next few years, it’s still a big unknown how it will play out in existing markets. But according to one researcher, Washington state’s 10-year regulatory framework for its legal market could serve as a solid launching pad.

The state’s approach, with its strict licensing controls and ban on vertical integration, stands in stark contrast to many more liberal markets elsewhere. And one of its key strengths, according to Dr. Boyoung Seo, an assistant professor of business at Indiana University who studies marijuana regulation, is that the system has its roots in alcohol control.

“What (Washington regulators) did was basically apply hard (alcohol) laws to marijuana,” she said. Green Market Report.

This approach has resulted in a tightly controlled marijuana market and a solid foundation for further development.

An Act of Balancing

One of the most distinctive features of Washington’s regulatory framework is its prohibition on vertical integration in the marijuana industry.

“If you grow it, you can process it. That part is allowed,” Seo said. “But what’s really important is if you grow it, you can’t sell it directly to consumers, which means you can’t have a point of sale — that’s strictly prohibited.”

The motivation behind it likely stems from public health concerns, she said. But states also need to consider the potential economic benefits. As the industry has grown, its fiscal impact has become more significant.

“I think marijuana now basically accounts for (about) 1% of the state’s total revenue (in Washington and Colorado),” Seo said. “So as the market matures, as it stabilizes, I think people are now looking at it as, ‘Okay, about 1% of the state’s total revenue now comes from recreational marijuana, which is a lot.’”

This is despite the fact that the rules for obtaining a license to operate a marijuana business are completely different.

“If I lived in Colorado, I could get a license, as long as I don’t have a criminal record or anything like that,” she noted. “But in Washington, it’s almost impossible now because the state actually sets limits on the number of retailers in the state and the number of growers, processors.”

At the other end of the spectrum, Colorado allows an unlimited number of cannabis business licenses. How significant is the difference? Washington state has an average of just 4.8 cannabis dispensaries per 100,000 residents, compared with about 14 per 100,000 in Colorado, according to Seo’s research.

Contrary to appearances, Washington’s tighter market has coincided with lower average marijuana prices compared to Colorado, which were higher on average in 2022, Seo’s analysis found.

All this makes it difficult for policymakers to find a balance.

“You want people to use it, to generate a lot of revenue for the state,” she added. “But at the same time, when people use it a lot, they spend more. So I think there’s a bit of a dilemma there.”

She further cautioned that comprehensive research on the effects of marijuana is still lacking.

“We don’t really have a good metric to determine how much dollars society has to pay if one more ounce of marijuana is consumed,” she said. “The dollar amount doesn’t exist because prior to this legalization, there was basically no research allowed. So the evidence is still accumulating.”

Still, states have a variety of regulatory tools, such as taxing by sales value, weight, or potency. But with a potential federal redesign, states may need to reassess their approach.

“If it gets postponed, technically it becomes legal,” she noted. “It’s not illegal in every state, but states have the right to make it illegal.”

Some states are already preparing for this possibility. Utah, for example, has indicated that “marijuana would remain a Schedule 1 substance in Utah without legislation,” according to a presentation by legislative researchers and the state’s chief legal counsel.

Other states, such as North Carolina, already have laws that essentially mirror the federal classification rules, “unless the commission or other drug authority in that state objects,” she said.

“Each state can basically decide what they want to do,” she said. “They can either legalize it and control it, or they can make it illegal.”