Federal marijuana reform looms after Senate flip — and Massachusetts could end up a loser

Local activists, investors, and operators see risks in reforms they’ve long sought

Activists wave flags during a 2019 rally on the East Lawn of the US Capitol in Washington, DC to demand Congress pass cannabis reform legislation.OLIVIER DOULIERY/AFP via Getty Images

With Democrats now in control of the White House and both branches of Congress, marijuana proponents say 2021 offers their best chance yet to end America’s longstanding national prohibition on the drug — or at least ease tight federal restrictions on cannabis research and banking for the legal pot industry.

But even advocates and marijuana business owners who have long demanded such reforms are eyeing the possibility of their implementation with decidedly mixed feelings.

That’s because a liberalization of federal cannabis laws — while it could reduce prosecutions, wipe away old marijuana convictions, and alleviate the many business headaches that come with selling a federally illegal product — threatens to massively disrupt state-regulated pot markets across the country.

In particular, the advent of interstate marijuana commerce, which is currently banned, would explode the economic assumptions behind growing cannabis in states such as Massachusetts.

Here, the alternately humid and cold climate means marijuana plants are cultivated almost exclusively at multimillion-dollar indoor facilities that take years to build and license and which consume eye-popping quantities of electricity and water. Meanwhile, the world’s best cannabis flower is grown outdoors for relative pennies in Northern California and Oregon, where a production glut has sent prices plummeting and prompted state legislators to consider authorizing exports.

“It would be ridiculous to require that orange juice sold in Massachusetts be made from oranges grown in Massachusetts,” said Justin Strekal, political director for the National Organization for the Reform of Marijuana Laws, or NORML, who lobbies Congress on marijuana legislation. “Why should consumers in Massachusetts pay a self-imposed inflated cost? There is going to be interstate commerce in marijuana eventually, and when that happens, there will be very, very few people cultivating in Massachusetts.”

An influx of cheap West Coast weed would imperil Massachusetts producers and also various programs that depend on the taxes and fees generated by those companies. At particular risk, analysts said, would be state efforts to create a diverse and equitable cannabis industry after decades of racially disproportionate arrests for marijuana. A pot price collapse would also reverse ongoing economic renaissances in so-called “gateway cities” such as Holyoke and Fitchburg that have welcomed marijuana growers into their long-abandoned mill buildings.

Strekal and most other observers don’t anticipate interstate pot commerce beginning for at least several years, however.

Federal legislative reform would have to come first, followed by a drawn-out period of rule making and public input involving numerous agencies. Then, state legislators and regulators — who might face intense pressure to instead protect local cannabis jobs and tax revenue — would have to OK imports and exports.

Indeed, cannabis investors in Massachusetts don’t exactly seem to be bracing for imports any time soon. According to the state Cannabis Control Commission, a total of 146 new cultivation facilities have won either provisional or final licenses and are preparing to join the 44 indoor greenhouses currently churning out the marijuana equivalent of Massachusetts-grown oranges.

“I don’t see the more ambitious reforms happening quickly, especially when there are much higher-priority items on the agenda for the incoming administration” such as the coronavirus pandemic, said Victor Chiang, a marijuana investor and founder of Massachusetts cultivation firm Weston Roots.

Steve Hoffman, chairman of the cannabis commission, told reporters last week that the agency has yet to study how federal reforms might impact the state’s marijuana regulatory regime. He said he’s hoping lawmakers will, at a minimum, pass bills allowing banks and federal tax collectors to treat licensed marijuana operators like other companies.

Because their proceeds are considered illegitimate by the IRS, cannabis companies cannot write off ordinary business expenses and often pay effective tax rates well above 60 percent. For similar reasons, most large financial institutions won’t lend to marijuana firms or even offer them basic checking accounts, in turn restricting participation in the sector mostly to those with access to wealthy private investors and forcing some companies to deal in large quantities of cash.

“If they’re going to prioritize anything, [I hope] it’s the banking,” Hoffman said. “That, to me, continues to be a gigantic issue for the industry from a public safety standpoint, and from an access and equity standpoint.”

Some local operators are looking warily at such reforms, though.

Aaron Goines, an entrepreneur who walked away from a career in finance to start Wareham cannabis firm Emerald Turtle, expects the mature cannabis industry will look roughly like alcohol, with a few large national Anheuser-Busch-like players jockeying for 80 percent of the market, while a handful of craft producers in each state cater to a smaller number of connoisseurs willing to pay extra for quality.

Goines is hopeful Massachusetts rules, such as equity mandates and a limit on the number of licenses and growing space any one firm can control, will auger against a thorough corporate takeover, and he agrees that the biggest obstacle keeping small businesses out of the space is a lack of traditional lending options.

Still, Goines fears that passing financial reforms without careful controls will unleash insurmountable competition fueled by billions in new investments and public offerings on major exchanges, while doing little to advance equity.

“If the capital markets opened up to cannabis tomorrow, having that liquidity would be like throwing gasoline on a fire,” he said. “Massive players from alcohol and tobacco and big ag[riculture] and big pharma will come in and go crazy in this space. ... If farms in the Midwest start growing thousands of acres, it’s game over for most of us.”

Marijuana proponents say Democrats’ takeover of the Senate has them feeling confident at least some reforms will pass this year. After all, marijuana makes for popular politics, with more than 67 percent of Americans backing recreational legalization and 94 percent supporting medical cannabis.

Meanwhile, the US House recently passed a comprehensive decriminalization package, new Senate majority leader Chuck Schumer is a legalization supporter, and President Biden campaigned on decriminalizing the drug and reducing prison populations.

Maritza Perez, director of national affairs for the Drug Policy Alliance, said her group is pushing comprehensive bills that would help the pot industry but also protect state regulatory programs, incentivize equity in licensing, and expunge old marijuana convictions.

Still, she said, more progressive cannabis legislation may fail to overcome Republican filibusters, or even Democratic reticence, in the closely divided Senate. Progress is initially more likely to come in the form of piecemeal legislation or executive actions from Biden’s administration, which could direct bank regulators and prosecutors to lay off state-legal marijuana operations, she said.

“Just because the Democrats have more power doesn’t mean something is automatically going to happen,” Perez said. “We still have a lot of education to do around marijuana.”

Perez and other supporters of reform, however, are determined to see through what they call the final stages of a decades-long fight to end the country’s prohibition on marijuana, and insist that concerns about disruptions to early adopter marijuana states can be addressed with creative and thoughtful legislation.

“We have to make sure we’re pushing for federal legalization to include all the equity-related lessons we’ve learned,” said longtime advocate and former Massachusetts cannabis commissioner Shaleen Title. “We need a united front, and communities of color to be prepared to walk away from the table if the proposed law isn’t specific about what happens after the legalization switch is turned on.”