New York local governments as participants in the cannabis economy

As I read it, New York’s new cannabis legalization law will allow the state government to license local governments to participate in the legal cannabis market by cultivating cannabis, manufacturing cannabis products, selling them at retail, or engaging in any of the activities for which cannabis licenses will be availability. In other words –if I’m right – then the City of New York, Erie County, the City of Poughkeepsie, the Town of North Hempstead, the Village of New Hempstead, etc., could be players in the legal cannabis market. (I’m not saying any of them actually want to do so – yet.)

New York’s new cannabis legalization law creates a structure for three markets: (a) medical use of psychoactive cannabis, (b) adult use (“self-regulated use”) of psychoactive cannabis, and (c) self-regulated use of non-psychoactive cannabis. It gives the state the ability to regulate the entire supply chain in all three markets. Let’s focus on the adult use market for psychoactive (THC) cannabis, which is where all the action is.

Article 4 of the Cannabis Law defines multiple license categories, including cultivator, processor, distributor, delivery service, and retailer (whether a retail “store” or a cannabis bar/lounge). There is something super-interesting in the general definitions of the entire statute in section, Article 2. Article 2, Section 3(1) defines “applicant” as “a person applying for any cannabis, medical cannabis or cannabinoid hemp license or permit issued by the New York state cannabis control board….” and further specifies that “For the purposes of this subdivision, “person” means an individual, institution, corporation, government or governmental subdivision or agency….”

This blogpost offers initial thoughts about the implications of this little quirk in the law.

Licensing local governments could create a “public option” that might compete favorably with for-profit, privately-owned entities. It might also allow opening of a legal market to begin sooner than later at the rate the state is moving.

Local governments could be employers in the cannabis economy, creating public sector jobs and potentially serving as a point of entry for people who would otherwise be competing in the open market as social and economic equity applicants.

The ability to cultivate is the most powerful point in the market. When you have some control over the creation of the product, you affect everyone downstream from you in the market. Let’s say that a municipal government or one of its subdivisions is licensed as a cultivator or manufacturer. Presumably the municipal licensee can sell to downstream licensees at a price lower than the competition, skewing prices in the market downward, to the benefit of the consumer.

One significant aspect of the adult use market is that the statute imposes detailed restrictions on what licenses one person (see above for what “person” means) can hold. For example, under the current statutory scheme a person licensed as a cultivator cannot also be licensed as a retailer, but it can also have a processor’s license and a distributor’s license. These restrictions track the structure of liquor law that prevents “vertical integration” in the market—no entity can control an entire supply chain.  It seems strange to me that a local government should also be subject to that restriction. What if the statute is amended to exempt local governments from the prohibition on vertical integration, allowing, for example, NYC to cultivate its own proprietary brand and sell it at retail? Perhaps no local government wants to bear responsibility for touching the plant, so let’s take it up a level with a different question.

What about amending the statute to allow local governments to begin operating now in a legal cannabis market as licensors? In other contexts, local governments have the ability to regulate industries within their jurisdictions, but there is a broad preemption clause in the MRTA that (with one exception relating to regulating the time, place, and manner of the operation of retail establishments) prohibits local governments from regulating the cannabis industry in any way, e.g., by issuing licenses. However, we see in front of us that implementation of the new cannabis law has already crashed: the state legislature and the governor have been deadlocked over appointment of the leaders of the regulatory bodies that must start developing regulations, an exercise that will surely take many months and is a prerequisite for license applications. The clock has not even started running on a process that could last for years before the legal markets can begin delivering products to consumers.

Why is it not possible to allow local governments to regulate their own cannabis markets until such time as the state government gets it together? Let the local government begin licensing cannabis market participants now – optimally from the legacy market – and keep the tax revenue; state regulators can review the experience of local regulations in operation.

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