DENVER — The U.S. Virgin Islands expects to legalize recreational cannabis soon, so the territory’s lawmakers came to Colorado—the first state to do that—to learn what’s working, and what’s not.
The delegation of three dozen, including 11 of the islands’ 15 senators and Governor Albert Bryan, came away with more than a simple playbook from their fact-finding visit to the Centennial State.
They learned about some of the most common pitfalls, and they got a clear view of the potential revenue a recreational marijuana industry can generate. Adam Orens, co-founder and managing partner of MPG Consulting, a leading strategic advisory firm in cannabis and hemp, gave a ballpark estimate of $40 million annually for the Virgin Islands; the islands’ annual budget is just over $1 billion dollars.
“This is a huge deal,” said Senate President Donna Frett-Gregory, who helped organize the visit “to learn from the lessons of Colorado.”
I definitely have learned that if we’re going to really do this in earnest as a territory, we’re going to have to really put the regulatory structures in place. —Virgin Islands Senate President Donna Frett-Gregory
In fact, each of the 18 states where recreational pot has been legalized has endured growing pains that offer lessons to others considering it. NCSL policy experts, national cannabis regulators and Colorado state officials offered their experiences on regulations, testing pot for impurities, taxing, enforcement and education. And each area is complex.
“I definitely have learned that if we’re going to really do this in earnest as a territory, we’re going to have to really put the regulatory structures in place. We’re going to have to ensure that our growers, our distributors, anybody that’s in the market overall, have to be well trained,” Frett-Gregory said. “And, of course, one of the great takeaways that I got from it was that it is always that concern regarding our youth in the territory. We must ensure that we are able to provide that educational component to the youth, do the necessary advertising about why cannabis is not something they should be using at an early age.”
Regulating the Industry
States have had to figure out who will be allowed to grow marijuana, manufacture products, distribute them and run retail establishments. It’s a coveted opportunity, and experts said it’s tricky to get it right.
Andrew Freedman was Colorado’s first “pot czar” when recreational cannabis was legalized by a ballot measure in 2012. He has worked extensively with states and other countries regulating marijuana, and is now senior vice president at the consulting firm Forbes Tate. He said some states set a high bar for licenses, requiring relevant experience and strong funding. Others open it up by having a lottery, though they usually require entrants to prove a certain level of expertise to participate.
Either way, someone won’t like it, Freedman said.
“You have to enter into it with this understanding it will be contentious,” he said. “If you are going to create a competitive system, make sure it is objective.”
And no matter how hard states try to get their licensing system right, “I think it’s fair to say 100% of the time, it has been litigated,” Freedman said. “It has been the rockiest part of the rollout to do the licensing system.”
Freedman reminded the delegation that marijuana is still federally illegal, even though the Justice Department has issued memos that emboldened states to pursue it. With that in mind, he said states have the responsibility to ensure consumers are protected.
“It probably has more testing than any other consumer good,” Freedman said. “States are in flux about how much testing is too much, how much is not enough.”
There’s a lot to look out for. Marijuana can get contaminated with mildew, mold, heavy metals, residual solvents or pesticides. Then there’s the question of potency of the product’s THC, the main intoxicating chemical in cannabis.
“States have a variety of approaches to potency. Some regulate it, some don’t but require it to be noted on labels,” said Karmen Hanson, NCSL’s associate director of health policy.
Potency was one of the big adjustments in Colorado when edibles first came on the scene. New York Times columnist Maureen Dowd famously came to Denver to try it out and got such a strong dose she hallucinated and couldn’t move from her hotel room bed for eight hours. Freedman, then the state’s director of marijuana coordination, acknowledged at the time, “The whole industry was set up for people who smoked frequently. It needs to learn how to educate new users in the market. We have to create a culture of responsibility around edibles, so people know what to expect to feel.”
A big part of creating that culture around edibles was to get the packaging right. The state created labels to identify a standard dose and explain the lag time before the dose hits. It also sought to ensure the packaging was childproof and avoided appealing to children.
But packaging is just one aspect of protecting children from legalized marijuana. Nearly every state with legal weed invests in education programs, but research shows underage users increasingly obtaining “dabs,” a concentrated and highly potent form. Virgin Islands Senator Kurt Vialet said this has him on the fence about legalizing marijuana. He was a math teacher and a school administrator for years. “I’m scared about our ability to enforce the laws to protect students,” he said. “I’ve seen too many problems when students get caught up in pot.”
Freedman said states can learn from their other regulatory agencies about what could apply to pot. Public health, agricultural and liquor licensing agencies have relevant experience; even gambling regulators can help determine the type and placement of security cameras to require in retail shops and grow operations, he said.
Taxes and the Illicit Market
Advocates of cannabis legalization often emphasize its potential to generate revenue for states and localities and sharply limit illicit market sales.
Experts say those two concepts are intertwined. Set the tax too high in a search for revenue, and the illicit market could thrive. If the tax is too low, it could cut into funding a state needs to manage the market and fund state priorities. And, like other aspects of this market, there is no one-size-fits-all answer.
Jackson Brainerd, with NCSL’s Fiscal Affairs Program, noted states have created taxes for recreational marijuana based on THC content, weight, potency or percentage of sales. They tax growers, processors and retailers or some combination. The rates range from 44.5% in Washington state to 15% in other states. And because pot businesses cannot claim federal tax deductions, their actual tax rate is much higher.
Brainerd says the tax rates are a “balancing act. The rationale is the same as any other type of sin tax, trying to deter use among the young and offset costs to society.”
States are spending that revenue in a variety of ways: education, social equity and community reinvestment. Brainerd said one typical pattern is states initially see a big jump in revenue that then plateaus, though no one can predict when.
That’s the thing about this income: It can be unpredictable. He noted California has had collections 45% below what was expected; Nevada’s collections were 45% higher.
But time after time, it generates big bucks.
“There are many costs to be aware of, but the eventual tax revenues and licensing are typically more than enough to offset that,” Brainerd said.
All that money itself poses a challenge: Most banks won’t touch it because it is illegal at the federal level, and they don’t want to risk their federal deposit insurance coverage. States have explored ways to provide banking services, but the cannabis industry has relatively few options. A bill in Congress, the SAFE Banking Act, would give banks legal cover to serve the industry. The House passed it this fall, but the Senate hasn’t taken it up.
And that illicit market? It still exists. In Colorado, it’s estimated that legal sales meet 97% of residents’ demand, but law enforcement reports cannabis is illegally distributed to other states. In California, the legal market is not able to meet demand, and reports say 80% to 90% of sales are on the illicit market.
On the third day of the summit, the delegation traveled to a marijuana grow operation that couldn’t have been farther removed from their home territory.
Roughly 90 miles southwest of Denver, the Telluride Bud Co.’s grow facility is at about 9,000 feet of elevation in Park County, Colo., which is nearly 17 times larger than the Virgin Islands.
But what happens inside—the science and art of growing this crop in a climate-controlled warehouse—could be replicated anywhere. The delegation saw all the steps, from the cloning of plants to replicate Telluride strains like Golden Goat and Gorilla Glue, to the final packaging of products worth tens of thousands of dollars.
Governor Bryan did a quick calculation after the tour based on what he learned about volume, prices and turnover of the crops every 30 days. He estimated the operation would earn about $4 million a year.
Bryan liked the sound of that. He didn’t come easily to supporting the marijuana industry.
He initially saw no benefits and thought claims it helped relieve pain were overblown. Then a friend’s CBD cream cleared up his persistent back pain.
Now he’s excited about the prospects of expanding beyond medical marijuana, which the territory legalized in January 2019.
“It’s not an easy lift, and there’s a lot of regulation, but even in the biggest castle that you want to build, you’ve got to start,” Bryan said. “And I think the first block is getting the legislation passed and then starting to do the groundwork to make sure we have a safe product and a product that people really enjoy.”
Kelley Griffin is a writer and editor in NCSL’s Communications Division.