The Effect of Ballot Initiatives vs. Legislation on the Marijuana Market

As of today, only 23 states in the country allow cannabis law reform through ballot initiatives for citizens to vote. That means more than half of states only allow changes to be made to cannabis laws through legislation.

In June 2017, Vermont was in the news for being one of the first states to possibly legalize recreational marijuana via action with the legislature. All other states that had legalized recreational use at the time had done so by ballot initiative. Although the bill was vetoed by the governor after it was passed by the state house and state senate, it was sent back with recommendations for changes.

Ultimately, the Vermont legislature did legalize recreational possession and use of cannabis, but it was not the first to do so. Two years later, Illinois became the first state to legalize and regulate recreational cannabis through legislation on June 25, 2019. However, Vermont was the first state to legalize adult possession and cultivation (not sales) in 2018.

With states legalizing via legislation and the trend of cannabis across the country (67% of American adults are in favor of adult-use legalization according to an October 2019 study by Pew Research Center), it is becoming more likely that future legalization will be done by state legislatures. If legalization is likely to occur in a state, state legislators would rather be in control of the process. This raises the question of which process of legalization is more favorable for dispensaries, cultivators, and any other actors in the cannabis industry.

How the Market is Held Back

Ever since some form of legalization started in the United States, there has always been a cloud of uncertainty that has chilled the market from reaching its full potential, mostly due to the current illegality of cannabis at the federal level. Such effects include the prohibition of trade across state lines, the inability of banking financial assets and the possibility that a business can lose all of its property in a raid by the Drug Enforcement Agency.

However, even in states with legalization, state and local regulations are still debated, which slow down how fast markets grow, including caps on license issuance in more cautious regulatory schemes.

Despite the bottlenecks, the number of cannabis-related legislative initiatives continues to grow. According to Marijuana Policy Project, in 2019, 27 states had active bills to legalize adult-use cannabis, 17 states had decriminalization bills, and 14 had bills to create comprehensive medical cannabis programs.

What the Industry Needs During the Legalization Process

Market participants typically desire two things: market stability and the least onerous regulations. For business planning purposes, cannabis merchants want to know the laws that are currently in place are well established and any kind of major change happens over a longer period of time with plenty of opportunity to comment. With ballot initiatives, it usually takes more time to establish what exactly the law is, since most states allow legislative tampering of initiatives in some form once they pass after an election.

For example, in Massachusetts, even though recreational use was legalized via ballot initiative in 2016, the legislature voted to delay the deadlines of the ballot initiative for regulation implementation and license issuance. Even in mid-June 2017, there was still debate on who would control the governing agency, the state treasurer or an independent commission. Finally, in November 2018, the Massachusetts legislature authorized the formation of the Cannabis Control Commission, a five-member independent agency.

At the same time, Vermont was in the process of working back and forth between committees, chambers, and the governor’s office so when legalization would ultimately occur from the legislature, all major intragovernmental disputes would be settled and businesses could be confident in investing and beginning commercial activity.

Second, businesses desire the least burdensome regulations to allow the market to flow as organically as possible — within reason. When legalization occurs via ballot initiative in a state where the legislature or governor did not favor such a law, it is more likely that the regulations implemented by agencies will be more onerous to err on the side of safety and account for the fears that state representatives had in the first place.

After a passed ballot initiative, state legislators will almost always have to create regulations that reflect the will of the people, but the high discretion they have can make all the difference for a well-functioning market — or lack thereof.

Legislation is a Good Market Foundation

Each state is unique with its political environment, so there is no one universal rule. Overall, it seems that legalization by the legislature with debate is more favorable for the market since regulations are written by agencies, not a ballot campaign — notwithstanding legislative alteration. When the government can allocate control without dispute, the market will be more stable and more likely to grow.

However, the mechanism of the ballot initiative and its profound influence on marijuana legalization should not be dismissed. Without this political process, it is very unlikely that there would be 33 states with some type of legal cannabis status. Ballot initiatives were the needed catalyst to show the people’s desire for legalization to the state legislatures and allow the cannabis market to become legitimate.

UPDATE: Since the original publication date of this post, two more states have legalized recreational cannabis. Michigan legalized via ballot initiative during the 2018 election while Illinois legalized by statute in 2019. Vermont has yet to pass a regulatory scheme permitting the sale of cannabis.

Originally published 6/16/2017. Updated 11/22/2019.