Ohio just legalized cannabis. Now comes the hard part

Posted Nov 9, 2023 on CNN

MinneapolisCNN — 

Ohio certainly wasn’t the first state to legalize recreational cannabis — 23 other states have done so since 2012 — but the Buckeye State’s arrival on that list could ultimately be quite consequential for the growing industry.

Ohio voters’ approval of a legalization measure on Tuesday comes just months after cannabis saw some of its most significant movements at the federal level. In late August, a US Department of Health and Human Services official recommended that marijuana be reclassified as a Schedule III drug. One month later, a cannabis banking bill passed a key Senate committee.

A conservative and politically influential state such as Ohio legalizing marijuana should be the straw that breaks the proverbial camel’s back in terms of bringing federal regulation to cannabis, said Andrew Freedman, a partner at Forbes Tate and executive director of the Coalition for Cannabis Policy, Education and Regulation. “As Ohio goes, so goes the nation,” he said.

“It’s not the reddest [state] — the reddest was Missouri — but it is historically important, nationally important, presidentially important,” Freedman told CNN. “I honestly think it will have massive reverberating effects on what Congress has to do about this.”

More than two-thirds of US states have legalized cannabis in some capacity: 38 states have approved comprehensive medical cannabis programs, and Ohio brings the recreational total to 24 states.

And support for legalization continues to grow. A record 70% of US adults surveyed by pollster Gallup said that cannabis use should be legal, according to a new poll released Wednesday.

Still, cannabis remains federally illegal, and marijuana is classified as a Schedule I substance, the harshest of all drug classifications.

“A ‘no’ vote does send a signal across the nation that this is a major, middle-of-the-road/leaning-right part of this country that is saying, ‘Not too fast,’ and yet it passed by an overwhelming margin,” Freedman said. “I do think that it is a very clear message to the federal government that prohibition is no longer the law of the land, even though it remains on the books.”

For Ohio regulators, legislators and business operators, now comes the hard part.

More work to come

The voter-approved recreational measure approved this week is far afield from early legalization efforts in the state. In 2015, residents overwhelmingly voted against a medical and adult-use measure that would have limited growing and sales to 10 properties, all of which were owned by an investor group that included the 98 Degrees boy-bander Nick Lachey.

The law allows for adults over the age of 21 to buy and possess up to 2.5 ounces of cannabis and grow some plants at home for personal use. Legal sales will be subject to a 10% excise tax, as well as other local and state taxes, and those proceeds will go toward communities with dispensaries, programs such as small and minority business development, and addiction treatment.

Existing medical cannabis dispensaries will have the opportunity to be grandfathered in and have first crack at licenses, but municipalities can decide whether to allow sales.

Since it’s a citizen-initiated measure and not a constitutional amendment, it could be modified or repealed in the Republican-controlled state legislature. Some lawmakers and Republican Governor Mike DeWine have opposed legalization.

But Freedman said: “I think the legislature needs to be careful, because it passed with large amounts of support (57% of voters approved), and generally, you should respect the will of the voters. But if there are parts of the bill that would create a lack of accountability, then those should be shored up.”

“For the most part, I think that they should have the nuts and bolts of a system that can have good inventory control, take bad actors out of the market and make sure that sales will stay internal to Ohio,” he said.

Some legislators may try to “slow-walk” implementation or try to scuttle it; however, others who see it as a potential economic development boon may try to push it forward, said Douglas Berman, executive director of the Drug Enforcement and Policy Center at The Ohio State University’s Moritz College of Law.

“That’s the to-be-determined on implementation, and of course this has been the story state by state nationwide,” he said. “Every state has had its own uncertainty for rollout. And given the fact that Ohio’s the 24th state is likely to help this go a little bit smoother.”

Industry woes

If all goes smoothly, Ohio’s recreational program could get up and running relatively quickly.

The law goes into effect on December 7; state regulators have to issue licenses to existing medical cannabis applicants within nine months and additional licenses to other applicants within two years.

“I certainly think, perhaps to the chagrin of some longtime Buckeyes, that it would be fair to say this is kind of a Michigan model that Ohio has adopted through this initiative,” Berman said. “In 2018, Michigan fully legalized cannabis, set a relatively low tax rate and my perception is it’s been a fairly successful industry there.”

Michigan’s cannabis sales hit a record $276 million in July, a time when industry members there and beyond have struggled.

It’s “pretty universally held at this point in time that this industry is not doing well,” said Irina Dashevsky, partner and co-chair of the cannabis law practice group at Greenspoon Marder.

Companies are struggling because of the federal-state disconnect that’s resulted in cannabis firms facing extremely onerous tax burdens, the inability to conduct interstate commerce, and lack of access to the full financial system the United States has to offer, she said. Additionally, some states have seen the number of operators — regulated and illicit — swell, resulting in a glut of cannabis product and, thus, plunging prices.

Investors have recoiled, and companies have had to turn to debt-based funding, but that’s expensive because cannabis companies can’t avail themselves of traditional financial services and bank loans, she said.

The Secure and Fair Enforcement Regulation (SAFER) Banking Act, which passed a key Senate committee, could allow cannabis businesses greater access to banks — but it does not solve all the issues the industry faces, Dashevsky said.

“There is this confluence of things that really lead me to believe that change of the federal level is on the forefront, but we’ve been there before and it hasn’t crossed the finish line for weird, outside reasons,” she said. “It should be regulated; no one’s saying it should be a free-for-all, but the people in the US want it legalized, and so for the federal government not to catch up after a decade? I think it’s definitely time, and Ohio is a huge indicator of that.”

Opportunities for expansion

Adult-use sales in Ohio could total an estimated $1.5 billion to $2 billion in the first year after market-launch, and $3.5 billion to $4 billion by the fourth year, according to industry publication MJBizDaily.

In five years of operation, Ohio could see between $276 million and $403 million in annual tax revenue, according to Drug Enforcement and Policy Center research. That’s a drop in the bucket of the overall state budget, which for fiscal year 2023 stood at $81.1 billion.

Harvest of OH, which opened medical cannabis dispensaries in 2021, is one of the Ohio firms gearing up for a major expansion to respond to what could be an “onslaught” of recreational sales, said Ariane Kirkpatrick, founder and majority owner.

Harvest will have the opportunity to receive three additional licenses at the recreational level and has already received approval for the expansion of its cultivation footprint.

“It’s all sort of new, it’s all up in the air right now, but we’re pretty adaptable,” Kirkpatrick said, noting the company’s team, processes and logistics that are already in place.

Harvest of OH also has the potential to help drive the industry forward by making it more inclusive, said Amonica Davis, the company’s chief operating officer.

“In the state of Ohio, with dispensaries, cultivators and processors, there are already over 150 operators and just a handful of us are Black,” she said. “And so we have a commitment, and we are very intentional in creating our workforce that is very highly concentrated with women at the executive level, over 50% of our employees are people of color, and much of our supply chain comes from partners who are traditionally underrepresented in this space.”

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