Rumors of the federal government legalizing cannabis continue to swirl. With Democrats controlling Congress and the White House, the chances for federal legalization have never been greater. So what if it happens? How will everything from licensing to distribution be addressed? And what if the whole cannabis system ends up mimicking what we do with alcohol?
Prohibition marked a significant turning point in our national view of alcohol. Its repeal ushered in a seminal change in how alcohol is regulated. You could make the case that federal legalization of cannabis will result in a similar structure for that industry. And if so, it is quite possible alcohol regulation could be taken away from the BATF and combined with cannabis regulation under a brand-new agency.
Regulation Before Prohibition
Prior to Prohibition, states largely controlled alcohol production and distribution. Most states allowed what was known as the ‘tied house’ system, a system in which alcohol producers could both sell at retail and operate bars and pubs. We would describe the same thing in modern vernacular as ‘vertical integration’.
The tied house system accomplished two important things. First, it allowed alcohol producers to tightly control every aspect of their business right up through sales. Second, it prevented states from exercising too much control. All of that changed when prohibition was repealed.
In the modern era, vertical integration in the medical cannabis space is hard to come by. The most restrictive states, like Utah for example, prefer to keep growers, processors, retailers, and testers separate.
How business owners view a lack of vertical integration is a matter of perspective. At Deseret Wellness in Park City, retail sales are the name of the game. Deseret Wellness is a medical cannabis dispensary whose products come from separately licensed processors. Would they prefer to be processors and growers themselves?
Regulation After Prohibition
Getting back to alcohol, the end of Prohibition left the federal government with some interesting decisions to make. Congress decided that it was best to pass most control back to the states. However, federal regulators would retain control over interstate sales and transport.
Maintaining that control gave Washington the opportunity to tax alcohol production and sales. To no one’s surprise, Congress wasn’t about to pass that opportunity by. Any opportunity to raise revenues is a good opportunity in lawmakers’ eyes.
As far as the states were concerned, the tied house system was done. Operations were kept separate in the years after Prohibition. They remain separate today, except for small numbers of craft breweries and distilleries that are given special exemptions.
More Control and Taxation
Getting rid of the tied house system gave states more opportunities to exercise control as well as greater revenue-generating potential. When you keep operations separate, it is easier to micromanage each one. And of course, you can tax business entities at every step of the process rather than only taxing retail sales. It has worked so well that the states have rarely considered changing how alcohol is regulated.
If and when cannabis is decriminalized at the federal level, it stands to reason that Washington and the states would seek to set up a system similar to the current alcohol system. Washington would control interstate commerce and transport. It might even license growing operations. Meanwhile, the states would be given control of production, distribution, and sale within their own borders. Politicians at every level would be flush with tax dollars to spend.
Interested in knowing what the cannabis industry will look like if marijuana is decriminalized? Just look at alcohol regulations. The alcohol industry provides the perfect blueprint.
