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The States Planning to Legalize Cannabis Should Avoid These 7 Big Mistakes

Legalizing weed? Here's exactly what your state shouldn't do.

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Ten states and Washington D.C. already have some form of adult-use weed legalization -- and the next states to legalize cannabis have a lot to learn from them. Legalizing weed brings massive new tax revenue, but it also requires navigating a messy road of creating, regulating and enforcing a brand new industry that will have significant demand from its inception. On top of that, cannabis remains federally illegal.

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To avoid disappointing residents and costing millions in tax revenue, the next states to legalize cannabis should avoid these seven big mistakes.

Legalization has three big problems, the biggest of which is federal.

Federal restrictions remain the biggest obstacle for the next states to legalize cannabis. Normal business considerations are much more complex for marijuana companies. This means not having access to banking services, which can include everything from loans to bank accounts to exit strategies.

Other complications resulting from weed's federal classification include only being able to operate a business within your region, which can be as small as a municipality. Taxes are also astronomically high for legal cannabis businesses. Federal roadblocks aside, the next states to legalize cannabis faces two other obstacles:

1. Incentivizing black and grey market businesses to join the legal, tax-paying market.

2. Creating and sustaining a legal market customer base.

To varying degrees, each state that has legalized recreational use has struggled with these obstacles. In order for the next states to legalize cannabis to succeed, legislators should avoid these seven big problems.

Don't tax too much.

By August 2018, California fell $100 million short of its projected annual tax revenue following marijuana legalization. It isn't a coincidence that California has high marijuana taxes. An eighth-of-an-ounce (approximately 3.5 grams) that would cost $40 on the black market is around $70 in stores.

To capitalize on legalization, the next states to legalize cannabis should stay clear of 40 percent taxes on weed, which is what they were in some part of California before reforms. As is predictable, high cannabis taxes encourage consumers to return to the black market.

Conversely, levying high taxes on weed businesses, rather than on the consumer, can short supply. An earlier iteration of Washington state legislation levied 25 percent tax on cultivators, producers and retailers. To avoid taxation at each level of the supply chain, cultivators and producers integrated with one another.

If states want to follow New York Mayor Bill de Blasio's vision for legalization and not create "big cannabis," they'll need to discourage vertical integration by not levying significant taxes at each step fo the supply chain.

Related: Study Warns Sky-High Marijuana Taxes Drive Consumers Back to the Black Market

Don't make it too easy to ban dispensaries.

Weed is legal statewide in California and Massachusetts. However, this does not mean that you can buy weed in all municipalities across the state. Just 33 percent of Californian municipalities have legalized recreational sales. The Boston Globe reported that 189 of Massachusetts' 351 municipalities banned weed shops before legalization.

If the next states to legalize cannabis want tax dollars and equal access to recreational and medical marijuana, then they have to make sure local governments can't create "pot deserts." For example, New York Governor Andrew Cuomo's proposed legalization currently states that only cities and town of over 100,000 residents will have that authority.

Set safety standards that smaller producers can meet.

In the fall of 2018, approximately 20 percent of California's weed failed lab tests. A product can fail for reasons ranging from pesticide contamination to mislabeling products. Requirements for tinctures and edibles are typically more stringent. The cost of these tests range into the thousands of dollars, which can leave producers with wares that they cannot sell in the legal weed market. As a result, they often turn to the black market.

Related: Pesticide Contamination Is a Growing Cannabis Safety Concern

Make sure there are enough testing labs, and that they're prepared.

Everyone agrees that the next states to legalize cannabis should give people access to safe products. This means that each state has to create a comprehensive infrastructure for lab testing. Without enough well-equipped labs, the market will be throttled by a testing bottleneck. California's packaging and testing regulations left dispensaries struggling with customers dissatisfied with the lack of products (and high prices for what they did have).

Not only are unhappy customers less likely to return when their needs are not met, but lower sales translates to less tax revenue for the state.

Do not overlook the importance of distributors.

According to New York's current version of the Cannabis Law, you cannot hold a distribution and a retail license at the same time. You can, however, legally produce and distribute products. This means that large scale operations will both produce and distribute their own product. Smaller farms that focus on growing the plant may not have a plan for distribution.

To prevent the creation of big cannabis in the next states to legalize cannabis, each must make sure to license enough distributors so as not to leave small farms without a means to get their product to retail locations. For example, Trinity County in California's fabled Emerald Triangle has more than 200 licensed marijuana growers but no distributors. This makes it difficult, if not impossible, for farmers to legally sell their products.

Related: Many Licensed California Marijuana Growers Face Regulatory Roadblocks Getting Their Harvest to Market

Have enough supply to meet demand.

We're on the verge of creating some of the world's biggest legal weed markets. For example, just New York City's retail cannabis market will be worth $1.1 billion -- that estimate does not include the rest of New York state.

But meeting demand will be a massive challenge nationwide. In order to meet it, the next states to legalize cannabis will have to make sure there are enough licensed weed producers, distributors, lab testers and retailers. This means making sure that obtaining a license is neither too complicated nor too expensive. If either is the case, producers and consumers will return to black market weed.

Related: 11 Facts Cannabis Entrepreneurs Should Know About the Black Market

Use a single supply chain tracking system.

One of the biggest forthcoming complications for the next states to legalize cannabis is creating a verifiable system for tracking product from "seed to sale."

This is complex when you have a supply chain that has to adhere to strict health and safety requirements and is forced to deal almost entirely in cash. Additionally, all states mandate that the entire process cannot occur all under one roof. For example, weed has to be tested by a third party.

There are software options on the market specifically designed for this purpose. Another solution for avoiding the paperwork, expense and hassle of seed to sale tracking is putting the marijuana supply chain on the blockchain. Some cannabis cryptocurrencies strive to do just that.

Related: Cryptocurrencies Could Solve 2 Big Problems for the Cannabis Industry

Legalizing weed can mean many different things.

There are states that have legalized weed and those that have not. However, legalization has vast distinctions across states and even municipalities within those states.

Cannabis legalization is, most importantly, what the majority of Americans want. It is also one of the most important steps to counteract the War on Drugs, the opioid epidemic and many more of our nation's problems. But how we tax weed, how we regulate and record its quality, and how we license producers, distributors and retailers will determine whether the next states to legalize cannabis are as successful as they can be.