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object(Timber\Post)#3711 (44) { ["ImageClass"]=> string(12) "Timber\Image" ["PostClass"]=> string(11) "Timber\Post" ["TermClass"]=> string(11) "Timber\Term" ["object_type"]=> string(4) "post" ["custom"]=> array(5) { ["_wp_attached_file"]=> string(12) "R_416PMR.pdf" ["wpmf_size"]=> string(7) "1180434" ["wpmf_filetype"]=> string(3) "pdf" ["wpmf_order"]=> string(1) "0" ["searchwp_content"]=> string(100118) "APRIL 2016 Patrick Murphy and John Carnevale with research support from Talib Jabbar Regulating Marijuana in California © 2016 Public Policy Institute of California PPIC is a public charity. It does not take or support positions on any ballot measures or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office. Short sections of text, not to exceed three paragraphs, may be quoted without written permission provided that full attribution is given to the source. Research publications reflect the views of the authors and do not necessarily reflect the views of the staff, officers, or board of directors of the Public Policy Institute of California. PPIC.ORG Regulating Marijuana in California 3 Introduction 5 H ow Did We Get Here? 6 California’s Evolving Marijuana Law 6 Regulation and Trade -offs 9 Cultivation and Production 10 Sales, Use, and Consumption 13 Taxes and Finance 15 Public Safety and Public Health 17 Governance and Accountability 23 Conclusion 26 References 27 A bout the A uthors 30 Acknowledgements 30 T echnical appendices to this paper are available on the PPIC website: www.ppic.org California led the nation in 1996 when it declared that marijuana use for medical purposes would no longer be a crime. Twenty years later, four states and the District of Columbia have legalized recreational marijuana use. In November 2016, Californians will be asked whether the state should follow suit. This report does not consider the wisdom of marijuana legalization. Instead, it takes the view that, if recreational marijuana use becomes legally sanctioned, then the debate must turn to how to design regulations that reconcile important, but differing policy goals. These include, among others, limiting the impact of the illegal marijuana market, reducing harm to public health and safety, and raising revenue for the state. The report explores the approach Washington and Colorado have taken to regu lating recreational marijuana markets. These two states have histories of legal recreational marijuana that, though brief, are the longest in the nation. What lessons can be gleaned from these experiments? Both states have designed mechanisms to track legal cultivation and production, thereby reducing the diversion of marijuana to the illegal market. They also tax marijuana transactions, collecting tens of millions of dollars in revenue. And it appears that neither overall use nor use by young people has ri sen dramatically. However, as in California, levels of use were already higher in those states than in the rest of the country. To limit the impact on public safety, both Washington and Colorado established legal definitions of drugged driving. Since then, in both states, greater numbers of people have been charged with driving under the influence. Nonetheless, it is impossible to determine whether those increases mean drugged driving has become more prevalent or that law enforcement is more vigorous. In addition, the change in marijuana’s legal status challenges drug abuse prevention specialists to develop effective messages. The short experience with legal recreational marijuana in Colorado and Washington and the lack of data on California’s marijuana market make it difficult to derive policy recommendations. However, from a governance perspective, it is possible to draw some general lessons for California. Three in particular stand out: (1) Both Colorado and Washington significantly adjusted marijuana regulation shortly after legalization. We suggest that California approach legalization with an eye toward flexibility. The regulatory process should be designed to facilitate needed changes. (2) Such an adaptable regulatory model will require a mechanism for collecting data on the marijuana market and evaluating the consequences of use. A strong and transparent reporting system will help ensure that future changes are based on solid research and analysis. (3) Finally, this is a venture into uncharted territor y, and marijuana SUMMARY CONTENTS PPIC.ORG Regulating Marijuana in California 4 remains illegal under federal law. These considerations suggest that California should err on the side of caution and adopt a relatively restrictive regulatory model for both the recreational and medical markets. A tight, single market wi ll make marijuana laws easier to enforce and to reduce diversion to other states and underage users. To be sure, a highly regulated legal market will undoubtedly be accompanied by a robust illegal market. From a political perspective though, it will be eas ier to loosen a tight market than to tighten a loose one. PPIC.ORG Regulating Marijuana in California 5 Introduction Amid changing perceptions about the danger of marijuana , states across the nation have relaxed and, in some cases, effectively eliminated legal restrictions against marijuana use. California was a leader in this shift 20 years ago when it passed Proposition 215, becoming the first state to allow possession of small amounts of marijuana for medical use. Since then, 23 other states plus the District of Columbia , representing about half the nation’s population, have enacted laws permitting medicinal marijuana use . Four of these states plus the District of Columbia, accounting for almost 6 percent of the U.S. population, have gone a step further by legaliz ing recreational use. A range of factors is driving these changes. These include the perception that the nation’s so- called war on drugs has failed , the disproportionate impact of drug enforcement on low -income and minority communities , and a broader criminal justice refo rm agenda . Whatever the reason, the public’s attitude toward legalization is changing. Today, 58 percent of Americans believe that marijuana should be legal , compared with about 20 percent two decades ago. 1 In California, 55 percent of likely voters support legal recreational marijuana, an increase of 6 percentage points over five years (Baldassare, Bonner, and Lopes 2015). These shifting attitudes could lead as many as 12 states to put proposals before vote rs to legalize recreational marijuana use. In California, a legalization initiative similar to the proposed Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) is likely to appear on the November 2016 ballot. If all 12 states vote to eliminate mari juana prohibitions, almost 60 percent of Americans will live in places where recreational use is permitted (see Technical Appendix A ). This major policy shift raises an important challenge: How should we regulate an industry that used to be illegal under state law and remains illegal under federal law? This report does not address the wisdom of marijuana legalization. Instead it asks, if legalization is to become a fact of life, then how should marijuana be regulated? And what are the trade -offs inherent in different approaches to legalization ? These questions have arisen before. In 2010, t he last time recreational marijuana use was on the California ballot, the RAND Corporation analy zed the potential impact on consumption and public budgets (Kilmer et al. 2010) . 2 In March 2015, the Blue Ribbon Commission on Marijuana Policy, led by the lieutenant g ove rnor and the ACLU of California , pe rformed an in -depth investigation of legalizing recreational use . Th e commission identified youth education and protection, public safety, and taxes as key areas of concern ( Newsom et. al. 2015). This report builds on those works by outlining some of the regulatory and public policy questions raised by legalization . We begin by reviewing the evolution of California’s approach to regulating marijuana and the complicated relationship between state and federal law. The report then considers what kind of fram ework and regulatory system would best achieve the varying goals of marijuana regulation. In particular, this report examines the trade- offs associated with different regulatory regimes based on the examples of Washington and Colorado, the two states with the most experience implementing recreational marijuana laws. We find that the potential effects of legalizing recreational marijuana are less predictable across many dimensions than other changes in public policy. If C alifornia m akes t his change, policymakers should establish a n outcome -oriented regula tory regime that identif ies specific objectives. Such an approach, combined with a monitoring capacity to measure social and economic effects, will allow policymakers to implement construc tive regulatory changes. 1 This level ties Gallup’s high point in its 46- year history of polling on this subject. See Gallup Analytics from October 2015 . 2 RAND more recently published an analysis of the key policy que stions surrounding legalizing marijuana in Vermont. While Vermont is in many ways a different state than California, much of the analysis and many of the issues they raised are common to all states (Caulkins et al. 2015 ). PPIC.ORG Regulating Marijuana in California 6 How Did We Get Here? In 1996, California enacted Proposition 215, becoming the first state to legalize medical marijuana. Two decades later, the state has large, well -established groups of growers, processo rs, and retailers. After California legalize d marijuana for medical use, 23 other states and the District of Columbia followed suit. Subsequent moves by Colorado and Washington to permit recreational use of marijuana were viewed as experiments that authorities in the U S and other nations could learn from . However, what were originally deemed isolated experiment s appear to have been supplanted by a national movement for marijuana legalization . If all the jurisdictions currently considering legalizing recreational marijuana do so, then, by the end of 2016, almost 60 percent of the U S population will live in places where medical use, recreational use, or both are permitted (Techn ical Appendix A ). Even if legal recreational use is still considered an experiment, no one can deny its scale. This puts the question of how best to regulate this new industry at the forefront of the policy agenda . And it raises the issue of whether the federal government should combat the movement or respect the wishes of the states and their constituents. Regardless of what the federal government does , California ns are weighing whether to move marijuana on the regulatory spectrum by voting on the question of legalizing marijuana for recreational use. California’s Evolving Marijuana Law Marijuana law has been evolving for more than one hundred years . California first passed legislation restricting its use in 1913. 3 Since th en, the state has made sever al changes to its marijuana laws, sometimes increasing, and at other times relaxing , restrictions (Technical Appendix B ). In 1996, California became the nation’s first state to legalize medicinal use of marijuana. 4 Since then, the state has taken additional steps to reduce penalties for unauthorized marijuana possession despite voter rejection in 2010 of a measure to legalize recreational use. 5 Recent changes have had significant consequences. A rrests for marijuana possession in California dropped by more than 80 percent in 2011, the year after passage of SB 1449, which made unauthorized possession of less than one ounce of marijuana similar to a traffic violation . In 2011, public safety realignment (AB 109) shifted responsibility for supervising many low -level offenders from state prisons to county jails in an attempt to reduce 3 Amendment to the state’s Poison Law. For further reading see Gieringer 2006. 4 California Proposition 215 passed in 1996 with 55.6 percent of the vote. 5 Proposition 19 garnered 46.5% of the vote in the fall 2010 election. Marijuana Legalization in the US after 2016? Twenty-four states and the District of Columbia have laws permitting medical use of marijuana. A s of 2015 , Alaska; Colorado; Oregon; Washington ; the District of Columbia ; and Guam; plus Portland and South Portland, Maine ; and Detroit, Ferndale, Flint, Jackson, and Lansing, Michigan ; have legalized recreational marijuana use . That picture could change dramatically after the 2016 elections. L egalization referendums are seeking ballot access in another 11 states.  154 million people , 48.3% of the US population, currently live in jurisdictions with legalized medical marijuana use .  18 million people, 5.6% of the population, live in jurisdictions where marijuana is leg al for both recreational and medical purposes .  After 2016, another 100 million people, 31.4% of the population, could live in states permitting recreational marijuana use.  In total, 185 million people, 58% of the population, could live in jurisdictions wi th legal medical and/or recreational marijuana use by the end of 2016. PPIC.ORG Regulating Marijuana in California 7 prison overcrowding . One consequence was that about 18,000 non- serious, non-violent offenders were redir ected from incarceration, including many serving drug sentences. In 2014, Proposition 47 reclassified a number of felonies as misdemeanors, including drug possession. The law was applied retroactively, reducing county jail populations by 10,000 in the firs t few months, including many drug offenders (Lofstr om and Martin 2015). FIGURE 1 Marijuana misdemeanor arrests dropped dramatically after decriminalizing possession of marijuana SOURCE: State of California Department of Justice . In 2015, California passed three bills to regulate the medical marijuana industry: SB 643, AB 266, and AB 243, known collectively as the Medical Marijuana Regulation and Safety Act (MMRSA) . Coming 20 years after passag e of Proposition 215, the laws established a new Bureau of Medical Marijuana Regulation under the Department of Consumer Affairs and laid out requirements for tracking medical marijuana distribution. The legislation also assigned other departments responsibility for product testing and ensuring that marijuana cultivation is subject to environmental protection. 6 MMRSA envisioned t wo marijuana markets in California — one recreational and one medical. In Colorado, dual markets have co mplicated legalization, while, i n Washington, m erging recreational and medical m arkets has proven difficult. While t he states have moved stead ily toward a less- restrictive approach to marijuana in recent years, the federal story is muddled. Marijuana is illegal under the US C ontrolled Substances Act of 1970 (CSA) and is classified as a Schedule I drug with no medical use . 7 The CSA bans marijuana- related businesses; the possession, cultivation, and production of marijuana -infused products ; and the distribution of marijuana and products derived from it. 6 Different provisions establish responsibilities for the Departm ents of Food and Agriculture, Public Health , Pesticide Regulation, Fish and Wildlife, and the State Water Board. 7 Other schedule I drugs are heroin and LSD. Cocaine, oxycodone, and methamphetamines are schedule II drugs under the CSA as th ey have some medical applications. 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 2005200620072008200920102011201220132014 Arrests MJ Felony (Sale) MJ Misdemeanor (Poss) PPIC.ORG Regulating Marijuana in California 8 Moreover , on two separate occasions the US Supreme Court ruled that the CSA trumps state law.8 That means that the federal government has the option of enforcing US drug law s, creating a climate of legal uncertainty. 9 Although the CSA’s basic prohibition remains in force, the Obama administration’s Justice Department has issued memoranda characterizing enforcement of federal marijuana prohibitions as low priority and instructing federal prosecutors not to take action against individuals complying with state medical marijuana laws. C ongress has inserted similar language in budget bills (see Technical Appendix B ). In essence, the federal government has decided to take a hands- off approach and not enforce anti -marijuana laws under some circumstances. However, the administration’s policy does not carry force of law . Future administrations could shift policy, leaving the question of federal prosecution unresolved . 8 In the 2001 case, United States v. Oakland Buyers Cooperative ( 532 U.S. 483), the court unanimously rejected the notion that medical need was a defense for violating the Controlled Substances Act by selling marijuana, regardless of its status under state law. Four years later, in Gonzales v. Raich (previously Ashcroft v. Raich 545 U.S. 1 2005), the Court ruled 6- 3 that an individual could not legally grow marijuana for medical use regardless of its status under state law. 9 States’ righ ts proponents argue that states have the authority to diverge from federal law regarding regulation and control of marijuana for reasons of public health. See www.kcba.org/druglaw/pdf/summary_s r.pdf. PPIC.ORG Regulating Marijuana in California 9 Regulation and Trade -offs With the looming possibility that Californians will vote to permit recreational marijuana, the challenge facing policymaker s will be to design a regulatory regime . Marijuana regulations will cut across many policy and program areas, including health, public safety, agriculture, environment, revenue collection, parks and recreation, education, and workplace rules. In designing marijuana regulations, authorities must define a set of objectives aligned with the public’ s desire for reform. California, like the states that have acted before it, can pursue several objectives in regulating recreational marijuana (Pacula et al. 2014) . But how can the value of different objectives be measured ? And what if pursu ing one objective works at cross -purposes with another? The ideal approach in comparing different regulatory model s is to systematically weigh costs and benefits. Unfortunately, little is known about how either the medical marijuana market or the illicit market are functioning in California and other states . It is impossible to say with certainty what the impact of key regulatory e lements would be, which makes perform ing a net cost/benefit analysis exceptionally difficult. 10 To be sure, MMRSA passage last year means California will not be starting from scratch . But the law’s provisions haven’t be en fully implemented , so assessment is not yet possible . In this report , we identify elements incorporated in most regulatory efforts to date and analyze them according to specific objectives. F or the sake of simplicity, we group regulatory objectives in five general policy areas: 11  Cultivation, production, and processing . This area focuses on turning marijuana plants into finished products and the sale of those products to consumers.  Sale, consumption, and possession. This area concerns how the state should regulate consumer use. For example, if recreational marijuana is legalized, what rules will apply when consumers possess more than the legal limit?  Taxes and finance . How should marijuana be taxed? Will taxes be base d on price, weight, potency, or other factors ? How will taxes be collected?  P ublic health and safet y. This area concerns minimizing harm to users by limiting abuse. It also covers preventing harm to others from drugged driving or workplace use, for example.  Governance. What is the role of state government in setting policy and enforcing regulations? How c an performance assessment and scientific research guide policy? 10 One recent report attempts to identify the complexities facing employers who are confronted with legal medical or recreationa l marijuana. The findings are qualitative, based on an expert panel’s conclusion that legalization will increase employer costs. ( See Rusche and Sabet 2015). 11 Our categorization is not perfect and their boundaries overlap. PPIC.ORG Regulating Marijuana in California 10 TABLE 1 A simple framework for structuring a r egulatory model Regulatory area Goals Regulatory Examples Cultivation, production, and processing Manage cultivation, limit supply, product standardization, quality control, eliminate diversion, protect the environment Licensure, canopy limits, location (e.g., distance from schools), plant tracking, use of pesticides, em ployee age and criminal history, flower/trim tracking, concentrates/extracts standards, waste management, THC/CBD restrictions, packaging, employee age and criminal history, owner/employee residency requirements, product labeling, warning labels Sale, consumption, and possession Limit access by youth, reduce arrests, eliminate diversion Age restrictions, product sale limits, inventory control, age of seller and employee restrictions , outlet types and density res trictions , product pricing, advertising , nonresident sale/use, hours of operation, advertising, gifting , home grows , use in public , personal possession of amounts above state limits Taxes/finance Limit abuse and dependence, raise revenue, limit illegal markets, prevent diversion Excise taxes; licensure fees; use of proceeds, i.e., general fund and/or earmarking of marijuana tax revenue for prevention, treatment, regulatory enforcement, and research Public health/ public safety Limit abuse and dependence, quality control, prevent impaired driving Use and driving, workplace use, prevention and treatment programs, use/consequences monitoring and evaluation Governance Oversee and ensure compliance, mount public information campaign focused on legalization costs and benefits State regulatory oversight, regulatory enforcement, marijuana policy outcome monitoring, regulatory flexibility NOTES: Table 1 is intended to provide examples. See Technical Appendix C for a more detailed description of the framework. We discuss below each of these areas in greater detail, draw ing from the experiences of Washington and Colorado— the two states with the longest histories of regulat ing recreational marijuana. We examine the regulatory options available to California based on the principle that marijuana rules should be simple and transparent while allowing for future modification. In each of the five areas , we identify an approach consistent with a tightly regulated market that limits the scale of operations and participat ion. If regulations based on this standard prove too tight, they c an be loosened at some future point. Cultivation and Production The federal government does not want marijuana grown and sold legally in California to go to other states. In addition, both federal and state officials want to prevent criminal enterprises from benefiting from legally produced marijuana . Governments at all levels also want to limit access to marijuana by minors. 12 Consequently, California would benefit from robust regulation of the entire supply chain , including cultivators, producers, wholesalers, and retailers, as well as regulation of product transportation along the supply chain. A significant and relatively unique challenge facing California is the size of its marijuana market. Currently, marijuana is legally grown and processed solely for the medical marijuana market. But California is also a large supplier to the illegal market outside the state (D rug Enforcement Administration 2014). Therefore, incentives must be created to draw participants into the legally licensed supply chain. In addition, to mitigate concerns about diversion, a “seed -to -sale” tracking system is needed to monitor the quantity of marijuana supplied to Californians for medical and recreational purposes. Colorado implemented its Marij uana Inventory Tracking System (metrc™) to track supply and prevent diversion. Washington State uses BioTrackTHC ™ to track legal marijuana cultivation, production, testing, transportation, destruction, and retail sale . If California creates robust licensing and tracking systems, it will be putting its best 12 Four of the eight guidelines in a 2013 federal memorandum, known as the “Cole Memo,” involve preventing the: 1) distribution of marijuana to minors; 2) revenue from the sale of marijuana going to criminal enterprises; 3) diversion of marijuana from states where it is legal to other states; and 4) state -authorized marijuana activity from being used to cover trafficking of illegal drugs or other illegal activity. The remaining guidelines apply to marijuana possession or growth on federal lands ; drugged driving ; and preventing violence and use of firearms in cultivation and distribution of marijuana. PPIC.ORG Regulating Marijuana in California 11 foot forward in following federal guidance. Of course, stiff penalties to suppress the illegal market are essential for California ’s legal market to succeed. 13 L icensing is a complicated question. How the market is licensed should depend on how much control and oversight California wants to exercise . The first issue is how to structure the marijuana industry. Should licensing encourage a vertically integrated mark et in which businesses operate throughout the supply chain , from c ultivation, production, and processing to retail sale ? Or should the industry be horizontally integrated, with businesses licensed in only one part of the supply chain? Vertical integration allows businesses to manage access to inputs throughout the production chain, enabling better cost control and more efficient delivery of product s to consumers. But if the regulatory objective is to encourage wider participation in the marijuana industry, horizontal integration may be preferable. A horizontally structured industry could be designed to favor small businesses, while a vertically integrated industry might result in fewer businesses controlling the industry. Washington has opted for horizontal integration . It offers separate marijuana licenses for cultivation, production, and retail sale, and market participants cannot hold all three licenses 14. In contrast, Colorado encourages vertical integration , issuing marijuana licenses for cultivation, ma nufacturing , testing, and retail sale . A single individual or organization can own more than one license . In California, MMRSA appear s to favor horizontal integration. 15 As a starting point, this model may make sense for recreational marijuana too. As the market evolves, the state could reconsider how the market is integrated. California must also consider the US De partment of Justice desire to limit the number of participants in the legal marijuana industry. A strong licensing system that restricts participation would be easier to oversee than a more competitive market with numerous participants. 16 Unlimited licensing c ould strain regulatory enforcement. However, limiting the number of licenses might jeopardize efforts to bring participants in the illegal industry into the legal fold. Colorado has not limit ed the number of licenses, but the application process is demanding. Washington initially limited recreational marijuana sales licenses to 334 based on estimated consumption levels. It later increased the limit to 556, citing a need to provide marijuana to medical patients. 17 California also must set limits on the scale and location of production operations. These include canopy limits— l imits on the area under cultivation and/or the number of plants —as well as cultivation rules in densely populated areas, such as not allowing marijuana facilit ies within 1,000 feet of a property line or near schools, recreational facilities, and the like. One approach would be to target total production for the legal market, determine a canopy limit, and calculate the number of licensed grows needed to meet that level of production. Placing limits on the number of production licenses an individual or organization can own would make it easi er for s mall businesses to operate in the market. Production regulations might include residency requirements. Limiting out -of -state investment could reduce criminal involvement and strengthen the state’s economy by allowing California residents to benefit more from the marijuan a industry’s economic opportunities. However, short -term residency requirements might lead to an influx of new residents . Length -of -residency requirements affect who participates in the industry and when they do so. Colorado requires two -year residency to obtain a license. Washington has a six -month residency requirement for license applicants and financiers, that is, any entity giving money, gifts, or loans. 13 There is a perception that legalization carries a dividend in the form of reduced need for enforcement. This is an empirical question. It is conceivable that enforcement costs could increase because of the additional expense of regulating legal marijuana while suppressing the illega l industry. 14 Washington Initiative Me asure No. 502 (I-502) ; appeared on the November 2012 ballot. 15 MMRSA changed medical marijuana licensing to allow for -profit businesses. The number of licenses available to entrepreneurs are not restricted. 16 MMRSA does contain a clause that permits mariju ana businesses that have already integrated vertically to continue to operate in that manner until January 1, 2026. 17 From Washington State Liquor and Cannabis Board Press Release, December 2015 . PPIC.ORG Regulating Marijuana in California 12 California is unique in the extent of environmental protection required to grow marijuana . Neither Colorado nor Washington included specific environmental protections in their legalization laws. By contrast, California’s medical marijuana regulations require mitigation of the “individual and cumulative effects of water diversion and discharge…[with rega rd to] instream flows needed for fish spawning, migration, and rearing.” 18 In crafting future regulations, protections can require that marijuana waste be ma de unusable without harming the environment. The discussion thus far assumes the market structure that is most commonly expected to prevail in the marijuana industry: a commercial style, competitive market that allows cultivation, production, and final sale to the private for -profit sector. This market would be regulated in accordance with an alcohol -s tyle regime that has age restrictions regarding use, restriction on how and where use occurs, and other things such as product labeling. There are alternative market structures that might be considered, such as government monopolies, nonprofit corporations , and for-benefit organizations. The benefits and costs of these alternative structures would have to be carefully delineated (Caulkins et al. 2015). 19 States that have legalized thus far use a commercial, competitive, but regulated market structure modeled after the alcohol industry; California’s medical marijuana industry is also structured this way. If policymakers seek to move quickly to allow recreational marijuana, they might choose to maintain this market structure. One critical re gulatory question c oncerns product testing. This requires labs qualified to test for mold, pesticides, tetrahydrocannabinol ( THC ) potency, and other variables . 20 THC potency data inform s consumers about dosage and may be used to set taxes . In addition, regulations might place restriction s on potency itself. Increased demand for marijuana for legal recreational use may require more labs to ensure that testing delays don’t choke off supply. If legal supply falls too low because of testing bottlenecks , the illegal market might fill the gap with untested product s. Increasing testing capacity sooner rather than later is the logical course for protecting product quality and consumer safety while s uppressin g the illegal market. M arijuana -infused products —marijuana edibles —pre sent additional challenges. E dibles can pose health risks to consumers unfamiliar with the ir delayed effects. After high -profile media stories raised concerns about marijuana edibles , Colorado created a task force to write regulations covering amounts that can be purchased, plus labeling and lab testing for potency. Meanwhile, Washington issu ed emergency regulations requiring that the Washington State Liquor and Cannabis Board approve product packages and labels. Washington also requires that labels promine ntly display serving-size information. The state also requires edible processors to follow available-for -inspection recipes ensur ing serving -size consistency. Such standards reduce overdose risk s and protect public health. 21 R egulation of the production chain involves a range of related, but distinct issues designed to achieve differen t objectives . In order to protect the environment , structure the market, and prevent diversion to other states and minors, we recommend a regulatory structure that tightly d ocuments and control s cultivation, production, processing, and sale of legal marijuana. A tight approach would limit the number of licenses and the scale of production , and impose strict testing requirements. Such a regime w ould help satisf y U S Department of Justice guidelines now , but can be modified in the future . To be sure, a tightly regulated market has problems. It could create incentives to oper ate illegally , which would present risks to 18 California AB 266. 19 See table 4.1 of the RAND report for a review of the strengths and weaknesses of each alternative market structure. 20 MMRSA task its Departments of Pesticide Regulation and Food and Agriculture with determine standards for pesticide usage in c ultivating marijuana. 21 In Colorado and Washington, an individual serving cannot have more than 10 milligrams of THC and when sold as part of a group or bundle, that bundle cannot exceed 100 milligrams of THC. Washington further restricts the production processes of edibles to ensure consistency. PPIC.ORG Regulating Marijuana in California 13 the environment and encourage diversion to minors and other states. Still, in our view, the advantages outweigh the disadvantages. Sales, Use, and Consumption Since recreational marijuana is currently against the law in California, legalizing it requires reforming the criminal code. R egulating legal access has two goals: revising the definition of criminal behavior while minimizing use by young people. Indeed, advocates say that decriminalizing use and distribution of marijuana is one of the greatest benefits of reform, both for the state and drug policy nationwide ( Clockb urn et al . 2013) . Enforcement of those laws has disproportionately fallen on poor people and minorities. In theory, legal recreational use will reduce the burden on the state’s police, courts, prisons , and jails, saving money. As noted though, enforc ing a new regulatory structure and suppressing the illegal market might ultimately cost the state more money. 22 Regulating recreational marijuana raises multiple questions. Table 2 shows some of the most important provisions adopted by Alaska, Colora do, Oregon, Washington, and the Dist rict of Columbia , where use is now legal . To greater or lesser degree s, the four states place restrictions on retail sales of recreational marijuana, and s ale remains il legal in the District of Columbia. 23 Existing laws a lso limit when, where, and how marijuana may be consumed, packaged, and labeled. TABLE 2 Regulating the sale, use, and consumption of marijuana Alaska Colorado Oregon Washington District of Columbia Ag e restrictions 21 and older 21 and older 21 and older 21 and older 21 and older Resident sales limits Up to 1 ounce Up to 1 ounce Up to 1 ounce Up to 1 ounce Sales illegal Fines, suspensions for sale to minors Determined by Marijuana Control Board License revocation or up to $100,000 in fines License cancellation and $4,950 fine License cancellation and $2,500 fine N/A Public consumption Unlawful Unlawful Unlawful Unlawful Unlawful Drug “tourist” distinction No distinction Sales limited to 0.25 ounces to non-residents No distinction No distinction N/A Home grows for personal use Permitted Permitted Permitted Not permitted Permitted Local ordinances restricting s ale/ use Permitted Permitted Local governments may not prohibit sales or use, except by general election referendum Permitted Congress can intervene SOURCES: Alaska Ballot Measure 2, Colorado Amendment 64, Oregon Measure 91, Washington Initiative 502, and District of Columbia Initiative 71. NOTES: See Technical Appendix B for complete description of the provisions . 22 As noted in Figure 1, the number of adult arrests associated with marijuana dropped d ramatically beginning in 2011. Criminal justice savings could be quite modest since it require a further drop in the number of adults arrested. Use and possession will remain illegal for those under 21. 23 Congress prohibits the District from making expenditures to regulate recreational marijuana . PPIC.ORG Regulating Marijuana in California 14 Alaska, Colorado, Oregon, and Washington limit recreational sales to people 21 or older. California is als o likely to impose a 21- year age requirement. The concern about marijuana use by minors is supported by research showing that marijuana can affect brain development —particularly thinking and memory —and learning. 24 The decision to set an age requirement is a case of regulatory trade-off . Though many people favor legal recreational marijuana, understanding that such a reform would increase overall marijuana use, even the most ardent advocates hold that young people’s access to marijuana should be restricted in the same way their access to alcohol is restricted. By setting an age requirement, po licymakers seek to limit youth exposure. However, keeping marijuana illegal for those under 21 means marijuana will remain a criminal justice matter. Providing marijuana to minor s will still be a crime. Despite legal recreational use, enforcement of mariju ana laws will remain a responsibility of the police and court systems. The four states that have legalized recreational sales confine them to marijuana -only stores, a distinction from alcohol , which in many states is sold in grocer ies and other retail establishments. Neither Colorado nor Washington allow marijuana to be consumed on store premises, and public use is prohibited. The two states also give local authorities some control over whether marijuana stores can locate in their jurisdictions and what re strictions govern their operations. Laws limit ing access to marijuana will only be effective if they are enforced. California should implement stiff penalties on underage marijuana sales and apply the law similarly to the way rules prohibiting underage alcohol sales are enforced . To test retailer compliance, l aw enforcement agencies can implement youth purchase programs in which minors attempt to buy marijuana (National Institute on Alcohol Abuse and Alcoholism 2014). California can also mandat e use of ID scanners for age verification or installation of closed-circuit televisions. In Colorado, the Marijuana Enforcement Division conducted 172 compliance checks between January 1, 2014, and September 30, 2015, according to the Department of Revenue. The agency found 16 violations , a 91percent compliance rate. 25 Washington completed its first round of compliance investigations in July 2015. It found 18 of 157 recreational marijuana stores sold to minors, an 88% compliance rate. T he noncompliant business faced a 10-day suspension or $2,500 fine. 26 Finally, California should consider exte nding the state’s social host law to marijuana. Currently , it makes adults and minors liable if they provide alcohol to those under 21 or allow them to consume alcohol on their property . 27 One wild card is home grows —marijuana cultivation for personal use. The states that allow personal cultivation limit the number of plants an individual may grow . Nonetheless, a llowing home grows creates a loophole in cultivation and consumption regulation. Individuals found with marijuana that cannot be traced in the production tracking system, is unlabeled, or exceeds quantity limits can claim to have grown it at home. In order to maintain tight control over cultivation and consumption, W ashington prohibits home grows. California sh ould consider doing the same . By removing the home -grow loophole, such a step would simplify the question of possession. However, banning home grows would be unpopular with recreational marijuana supporters . Consistent with creation of a tight market, we recommend restricting use to those 21 and over . Quantity limits should be imposed and marijuana should only be available in stores established specifically to sell it. To discourage underage sales, penalties f or selling to minors should be significant , includ ing possible license forfeiture . 24 See the National Institute on Drug Abuse . 25 Reported in The Denver Post on September 30, 2015. Colorado Marijauna and Enforcement Division (MED), 2015. 26 From Washington State Liquor and Cannabis Board, July 2015 Press Release . 27 Under the law, recently upheld by the State Supreme Court (Ennabe v Manosa, 2014), victims of crimes committed by minors may seek damages from the person who gave them alcohol or allowed them to consume it. PPIC.ORG Regulating Marijuana in California 15 Taxes and F inance Tax es are usually seen as m easures to raise revenue for government. But, for certain products perceived as having harmful social or health effects , taxation provides a way to influence consumer choice and reduce negative consequences. Depending on how taxes a re levied, they affect a product’s price . Higher prices tend to lower consumption, thereby reducing the harm a product causes. 28 Policymakers must determine the goals of marijuana taxation and strike the right balance between reducing consumption and raising revenue. I f the goal is to limit consumption, high tax rates that raise retail prices should deter recreational use and reduce negative consequ ences , such as abuse. However, th is benefit may be lost if prices are set to o high. Steep marijuana prices c ould fuel the illicit market, the opposite of what legalization is intended to achieve. 29 Cigarette taxes are t he obvious analogy. R esearch shows that higher cigarette costs reduce consumption, particularly among young people. 30 Th us, reduc ed consumption and increased revenue are both benefits of cigarette taxes . But finding the best cigarette tax rate involves difficult trade -offs . A h igher tax would deter consumption, but might diminish revenue . The four states with legal sale of recreational marijuana impose taxes both to raise revenue and deter use. Those taxes keep marijuana prices artificially high, but not so lofty as to fuel the illicit market. State experience with taxing marijuana is too brief to identify the price inflection points. However, both Washington and Colorado have generated millions of dollars in marijuana tax revenue. In taxing marijuana, s tates must d ecide the tax base , that is, what to tax . They must also decide where to apply tax es: at final sale or at various points along the production cycle . For the tax base, three areas are usually considered : weight, price, and potency , each with advantages and disadvantages. A weight -based tax is fixed by quantity, for example , $50 dollars an ounce. Such a tax is easy to administer, simple to understand, and can be implemented quickly. However, it creates an incentive for sellers to differentiate products by potency, which co uld harm consumers ( Caulkins et al. 2015). A price -based tax —also known as an excise tax—is set as a percentage (ad valorem) of value. Such a tax is levied on the seller and treated as a business cost . Typically, it is passed along to consumers in the final retail price. 31 Ho wever, states should consider that higher retail price s spurred by this tax could run counter to the goal of reduc ing the size of the illegal market. 32 A price-based tax is simple and easy to implement and administer.33 But, if imposed on cultivators, producers, and processors, it creates incentives for tax evasion from “phony prices” along the supply chain ( Oglesby 2015). A potency- based tax is assessed on a product’s THC content and could potentially control product quality . Unlike a weight -based tax , which enables sellers to differentiate their products according to THC content, a potency - based tax addresses product strength directly. 34 However, a potency-based tax has many disadvantages, especially t he challenge of ensuring that product testing is reliable (Gravelle and Lowry 2014). Determining when and at 28 The extent of the change in consumption depends on what economists refer to as the price elasticity of demand. 29 Product quality control can also check the illicit market. Consumers may favor legal marijuana because they have greater assu rance that the product doesn’t contain toxic adulterants or pesticides 30 For a synthesis of 108 studies on the impact of taxes and prices on cigarette consumption, Bader, Boisclair , and Ferrence , 2011. Of the 31 published studies that focused specifically on youth, 23 found a reduction in prevalence and four found reduced prevalence under particularly circum stances. 31 A subst antial body of literature notes that the excise tax burden is not borne solely by the consumer. How the burden is distributed depends on the relative elasticities of supply and demand. 32 A price- based tax can also be assessed on consumers of the final prod uct through a sales tax. A sales tax is calculated as a percentage of the retail value (percentage of the final sale price) and is much simpler to manage. Unlike the excise tax on sellers, its cost is directly apparent to consumers who see it added to the retail price at the final point of sale. However, a sales tax might enable tax evasion, “because it allows untaxed marijuana to linger in the supply chain be fore a retail sale takes place” (Oglesby 2015). 33 However, because it is calculated as a percentage, a price -based tax is regressive, taking a larger share of the disposable income of poor people. 34 A potency -based excise tax could help control potency levels and ensure that consumers know a product’s strength (McCoun 2010). PPIC.ORG Regulating Marijuana in California 16 what stage to test products would be a regulatory nightmare. And a potency tax could encourage “lab shopping” in which marijuana producers and sellers look for testers who offer the most favorable results. Another question is whether product transfer s along the supply chain should be taxed. Such a levy could be structured as an excise tax at a fixed price per unit of volume when a product is moved between locations. Alternatively, it could be assessed as a percentage of product value at various transfer points before reaching consumers. Such a tax would also affect retail price s. 35, 36 Colorado impose s a 15 percent excise tax , a special 10 percent sales tax , and the standard 2.9 percent state sales tax , plus applicable local taxes, on recreational marijuana . Medical consumers pay only the 2.9 percent state sales tax and other local taxes (Colorado Department of Revenue 2015). Washington initially levied a 25 percent tax at three stages along the supply chain. In July 2015, the state legislature change d the tax model , impos ing a 37 percent retail tax on top of the standard 6.5 percent state sales tax . Business taxes, occupation tax es, and other local taxes also apply . 37 I n the end, simplicity and convenience may determine how and at what point in the supply chain California sets marijuana tax es. A complex tax system designed to achieve multi ple social objectives has some advantages. But Washington offers a cautionary tale. It found that complexity created undue administrative and regulatory burdens. Simplicity won the day. Table 3 shows that revenue generated from marijuana taxes can be substantial . How much revenue California collects will depend on the scale of the legal market, the tax rate structure, tax avoidance, and individual behavior. 38 In 2010, wh en California looked at taxing recreational marijuana use, revenue estimates ranged from $674 to $1.4 billion. 39 The California Legisla tive Analyst’s Office (LAO) estimates that legalizing recreational marijuana could save the state more than $100 million in criminal justice expenditures and generate “from the high hundreds to over $1 billion ” in additional revenue (2015). By comparison, in 2014, the state collected $49.5 million in sales tax from medical marijuana dispensaries that reported sales , according to the state Board of Equalization. 40 California received $782 million in revenue from tobacco taxes in 2013 (California State Board of Equalization 2015). 35 Discussion with Colorado officials suggests that the state’s tax or fee on product transfers has a problem because returned products are subject to the fee. 36 U nder federal tax law, businesses in states that permit medical and/or recreational use are prohibited from deducting sta ndard business expenses such as payroll and rent against gross sales receipts (26 US Code, 280E). Marijuana businesses also may not deduct the state excise taxes assessed on retail marijuana sales. Thus, f ederal taxes are assessed largely on gross rather than net income, substantially increasing tax burdens of marijuana businesses. Those businesses may still deduct expenses unrelated to marijuana (Internal Revenue Service, 2015). This high federal tax burden, combined with the need to keep retail prices in line with demand, may make recreational marijuana less profitable than some entrepreneurs anticipated and hold back the legal recreational market ’s growth. 37 Washington originally charged producers, processors, and retailers a 25 percent value -added tax, b ut administering it proved complicated. The 37 percent tax took effect July 1, 2015. See Second Engrossed Second Substitute House Bill 2136, Washington state legislature, 2015. 38 The Washington and Colorado experiences suggest there will be a learning curve no matter how reasonable initial forecasts may appear. The challenge forecasting revenue is that little is known about consumer demand because recreational marijuana has been illegal. Colorado grossly overestimated tax revenue in the first year after legaliz ation. It projected $70 million , but only realiz ed $44 million ( Associated Press February 2015). Washington significantly underestimated first -year tax revenue . It project ed $36 million and realiz ed $70 million ( Associated Press July 2015). Since th en, tax revenue has grown tremendously in both states and has beg un to cover regulatory costs, plus earmarks for service such as substance abuse prevention. 39 The RAND Corporation estimated from $674 million to $883 million based on a $50 -per -ounce excise tax (Kilmer et al. 2010). Using the same tax rate, the California Board of Equalization estimated $1,382 million (2009). 40 Those taxes were based upon reported taxable income of $570 million from 1,623 dispensaries registered with the Board of Equa lization. It is not clear what share of California dispensaries that represents. Passage of MMRSA is expected to routinize tax reporting. See https://www.boe.ca.gov/news/marijuana.htm . PPIC.ORG Regulating Marijuana in California 17 TABLE 3 Colorado and Washington m arijuana taxes generate substantial revenue (dollars in millions) Colorado Washington Tax rates 15% excise 10% special sales 37% retail sales State sales tax 2.9% 6.5% Taxes on medical marijuana Only sales tax Same Projected FY2016 recreational marijuana tax revenue1 $125.0 $115.1 Actual receipts, first quarter fiscal year 20162 $34.0 $38.6 NOTES: 1 The Colorado and Washington fiscal year s begin in July and end in June. The revenue forecast for Washington is for a July –June 2015 –2017 biennial budget. The Washington forecast for the cannabis excise tax as of September 2015 is $230.2 million . 2 Colorado t ax receipts are for the fi rst quarter of FY 2016 (July – September) as reported by the Colorado Department of Revenue. A nother question is how to use marijuana tax proceeds. It is politically advantageous to temper opposition to a marijuana tax by designat ing a popular cause or program to receive revenue. Earmarking revenue can be a way of financ ing regulatory oversight of the marijuana industry and support ing public health activities. 41 M aking regulatory enforcement dependent on tax revenue f rom the industry it oversees could create conflicts of interest. And it can be argued that earmarking is bad budgeting policy (Phillips 2015). On the other hand, designating marijuana revenue for regulatory operations makes regulatory costs transparent. Colorado earmarks marijuana funds for public schools , capital construction, and enforcement o f marijuana industry regulations (Colorado Proposition AA 2013). Washington earmarks funds for campaigns to discourage use by minors, public education and public health, and program impact evaluation . Marijuana revenue does not finance regulatory oversight 42 Finally, cash is the financial elephant in the room. Because marijuana remains illegal under federal law, businesses cannot obtain standard bank ing and financial services. In response, states accept license and tax payments in cash. Ev en the IRS now accepts cash . But the fact that cultivators, producers, processor, and retailers do so much of their business in cash makes it easier to avoid reporting income. Moreover, marijuana businesses pay for services such as construction and legal assistance in cash, multiplying the problem of unreported income. Lack of access to financial services means that, despite legalization, a large fraction of marijuana commerce will remain unreported , resulting in lost tax es for governments at all levels. 43 Public Safety and P ublic Health For any psychoactive substance, an important regulatory goal is protect ing the community and , in particular, the well -being of young people. Californians already use marijuana at a relatively high rate . As with other drugs, some of that use is abus ive and harm ful. If recreational marijuana becomes legal, th e amount of use will probably rise further. 44 The challenge is to mitigate the of impact of legal recreational marijuana on public health and safety. The issues of greatest concern include drugged driving, protecting young people, and preventing addiction and abuse. 41 Regulatory costs include licensing, product monitoring, and enforc ing product quality, lab certification, labeling, and other rules . In a public health context, marijuana -funded services could include programs discouraging minors from using marijuana and providing treatment if they abuse it. Mar ijuana education and health campaigns, and treatment and recovery services for adult abusers can also be earmarked. 42 Washington State Legislature, Uniform Control Substance Act 69.50.545. 43 Large quantities of cash also mean marijuana businesses must spend heavily on security to deter robberies and protect employees. 44 See Technical Appendix D for a discussion of current levels of marijuana use in California and the impact of legalization in other states. PPIC.ORG Regulating Marijuana in California 18 California can take specific steps that d raw on the experience of other states and on efforts to counter the dangers of alcohol . Driving and impairment Driving under the influence of marijuana can be dangerous, but little is known about how marijuana impairs driving. Marijuana affects reflexes and motor skills (Ramaekers et al . 2006) and its use has been linked to increased accidents (Asbridge et al. 2012). 45 Moreover, research shows that accident s are much more likely for those under the influence of both marijuana and alcohol (Smiley 1999). Many Californians who consume marijuana already get behind the wheel (Lacey et al . 2012). If the number of recreational user grows, it will increase the number of drugged drivers on the roads, even if the rate of people who engage in this risky behavior stays the same. The state should take whatever steps it can to minimize drugged driving. A n obvious starting point is a public service campaign to educate drivers about the danger of driving after using marijuana, similar to efforts aimed at combatting drunk driving. In addition, the state can increase enforcement and penalties to deter drugged driving. Harsh sanctions should offer a deterrent . But cannabis presents a unique enforcement challenge. B lood alcohol content (BAC) has long been used to measure driving impairment . All states now use a 0.08 BAC level as the legal limit for driving under the influence of alcohol. Technology allows accur ate roadside test ing. And the California D epartment of Motor Vehicles has issued guidelines that let drivers estimate their BAC based on body weight and quantity of alcohol consumed. No equivalent standard exists for marijuana. R esearchers disagree about a “safe” level of blood THC. One study suggests that impairment is correlat ed with a THC content between 7 and 10 nanograms per milliliter (Grotenhermen et al. 2007) . States with per se laws— including Washington and Colorado—h ave settled on 5 nanograms per milliliter to establish impairment. 46 Those opposed to setting an absolute level note that the causal link between THC blood levels and impairment has not been established as it has with blood alcohol (Armentano 2013). A recent US Department of Transportat ion study echoed the point, conclud ing that “specific drug concentration levels cannot be reliably equated with a specific degree of driver impairment" (Berning, Compton, and Wochinger 2015). T here is also a practical consideration regarding testing for d rugged driving. The alcohol breathalyzer is accurate and can be administered safely on the side of the road. Drawing blood to test for THC is far more complicated, requiring medical personnel and chain- of-custody procedures. 47 Data from Washington and Colorado show that increases in positive tests for marijuana are associated with higher rates of traffic accidents and driving infractions . However, it is difficult to determine whether the rise in drugged driving detection is the result of increased access to marijuana, more people using marijuana, or simply stepped - up law enforcement. Colorado l aw enforcement officials point to a recent increase in cannabis- related traffic fatalities as evidence of harm from legalization. The fede ral highway fatality reporting system found that the share of Colorado drivers involved in fatal accidents who tested positive for marijuana rose from less than 8 percent in 2008 to almost 11 45 Like alcohol and driving, the level of impairment and subsequent level of risk varies according to person’s size, the length of time between use and driving, and frequency of use. 46 For Washington, the DUI limit was part of the legalizing initiative I 502. The Colorado legislature passed their DUI limit (HB 1325) as part of a group of laws implementing Amendment 64. 47 Saliva testing— done in the United Kingdom —has been proposed as an alternative. However, the large number of motorists who tested positive in early use of the test suggests either an epidemic of drugged driving or an overly sensitive test (Massey and Payne, 2015). The cheek swab test was introduced in March 2015. In the first two months of implementation, police reported a positive testing rate for cannabis and cocaine ranging from 25 percent to 56 percent, with cannabis accounting for the vast majority of positives. This compares with a positive rate of about 5 percent in roadside alcohol tests. Researchers at Washington State University have said they hope to have a breathalyzer -like test available by 2016 (Santos 2015). PPIC.ORG Regulating Marijuana in California 19 percent in 2010 after medical marijuana was legalized and 19 per cent in 2014 after recreational use was legalized (Rocky Mountain H igh Intensity D rug Trafficking A rea 2015). Blood tests performed on Washington motorists also show an increase in drugged driving. Positive tests for THC rose from 18 percent in 2009 to 33 percent in the first four months of 2015 (Couper 2015). However, no THC blood level trend is evident. Of drivers who tested positive for THC in 2015, 44 percent were above the state’s 5 nanogram per milliliter impairment standard, with an average concentration of 4.2 ng/mL. That compar es with 49 percent above 5 nanograms and average concentration 4.6 ng/ mL in 2009 (Couper 2015). If California legalizes recreational use, it should act decisively to reinforce drugged driving prevention and deterrence. The state must take steps to ensure that enforcement of drugged driving laws is consistent and effective. Th at will require training and development of an accurate, practical test for marijuana that can withstand court scrutiny. FIGURE 3 Positive driver tests increased in Colorado and Washington. SOURCE S: Rocky Mountain High Intensity Drug Trafficking Area . Washington State Toxicologist. NOTE: Washington data for 2015 is projected from the first four months of the year. Washington impairment standard was THC levels 5 ng/mL and above. The Colorado lab used THC levels of 2 ng/mL to confirm a positive test . 0 1000 2000 3000 4000 5000 6000 7000 8000 2009 20102011201220132014 Drivers Colorado Tests conducted Marijuana detected Above confirmation level* 0 1000 2000 3000 4000 5000 6000 7000 8000 2011 2012201320142015* Drivers Washington Tests conducted Marijuana detected Above impairment standard* PPIC.ORG Regulating Marijuana in California 20 A prime source of information about marijuana and driving is the Fatality Analysis Reporting System (FARS), a nationwide National Highway Traffic Safety Admin istration database on fatal motor vehicle accidents . The FARS data provide information on the number of drivers involved in fatal car accidents who tested positive for cannabinoids. However, t his data has limitations. Reporting in California is in consistent because there is no statewide standard for lab testing of drugs , and measurement has changed over time. And, i mportantly, positive results don’t necessarily demonstrate impairment, especially because cannabinoids stay in the system much longer than other drugs. With those caveats, t he data indicate that fatalities in California involv ing drivers testing positive for cannabinoids r ose from 62 in 1994 to 292 in 2014. 48 Of fatal crashes with positive marijuana results, 37 percent also involved blood- alcohol concentration s above the legal limit. By comparison, fatalities that involved BAC concentrations above the legal limit dropped from 1,468 to 882 over the same period. 49 FIGURE 4 Testing for marijuana an d alcohol in California traffic fatalities Source: Fatality Analysis Reporting System , National Highway Traffic Safety Administration . Minimizing underage use Many young Californians use marijuana. That will continue if recreational use for adults is legalized despite prohibiti on of sale to minors . Moreover, permitting a recreational market sends a message to youth and could make marijuana more appealing. California should help young people mak e good choices about psychoactive substances such as marijuana and act to prevent its promotion to minors . To keep you ng people from using marijuana , California should implement prevention strategies similar to those involving prescription drug misuse and underage alcohol and tobacco use. Although underage alcohol and tobacco consumption are illegal—as is use of prescription drugs without medical authorization— adults are free to 48 In 1994, 4,227 traffic fatalities occurred in California. A driver tested positive for marijuana in just over 1 .5%. In 2014, of 3,074 fatalities, 9.5% reported a driver with positive marijuana tests. 49 Some research suggests that increased marijuana use could reduce traffic fatalities if marijuana were to become a substitute for alcohol (Anderson, Hansen, and Rees 2012). This does not suggest that driving under the influence of marijuana is safe, but that patterns of use may affect driving differently from alcohol. 0 50 100 150 200 250 300 350 400 Fatalities Marijuana (or cannabinoid substance) positive results Marijuana with alcohol levels above legal limits (>=0.08 BAC) Marijuana with alcohol within legal limits (0.01- <0.08 BAC) PPIC.ORG Regulating Marijuana in California 21 use these products. The social acceptance and legal status of these products for adults may cause you ng people to assume they are safe (National Research Council 2004). Strategies to prevent minors from using marijuana should first disseminate accurate information to correct this normative belief and then address other factors. In a ddition, California c an implement parental education programs to encourage adults to keep recreational marijuana secure and monitor supply. These could be modeled after similar parental education programs for prescription drugs (Johnson et al . 2007). By encouraging parents to lock up marijuana, such programs could reduce both intentional and accidental use by children and youth. Deterrence and education are the best strategies to minimize underage marijuana use, but regulation of marketing also plays a part. Both Washington and Colorado adopted provisions to limit marijuana’s appeal including restrictions on marketing through traditional media such as billboards, television, radio, newspapers . They also regulate outlets and signage. Washington’s law is specific, even dictating square inches allowed for signs. However, Washington’s marijuana agency f inds enforcement of signage provisions cumbersome and believes some retailers have developed ways to circumvent the law’s sp irit. California currently prohibits advertisements promoting physician recommendations of medical marijuana unless such ads not e that cannabis is a S chedule I drug (Section 2525.5 of Article 25, U.S. Senate Bill 643, 2015). If recreational use is approved, regulation of marijuana marketing must be strengthened to protect minors. California should adopt a realistic strategy that acknowledges the difficulty of controlling messages that reach young people. The rise of digital media makes regulation much harder and social media have boosted the impact of word -of - mouth marketing . A new law should restrict itself to establishing basic principles and leave details to a regulatory agency. Such an approach enable s restrictions to react more easily to unforeseen marketing practices. California can look to Colorado and Washington and its own medical marijuana rules for strategies to prevent accidental recreational marijuana use by young people. Colorado and Washington have packaging requirements similar to a rece ntly passed California law covering medical marijuana (SB 266 ). This law does not require childproof containers like those for prescription medicine and dangerous household products . But it sets packaging standards arguably more stringent than those for tobacco and alcohol , requir ing that marijuana and cannabis products use tamper -evident packaging that cannot be “attractive to children .” Packages also must include specific caution labels (section 19347). California can apply these and other rules to recreational use as well. Abuse, dependence, and t reatment The extent of marijuana abuse and dependence will depend directly on how prevalent marijuana becomes if recreational use is legalized . Research suggests that a rise in users and easier access to marijuana will increase the incidence of addiction and abuse (Hasin et al . 2015). For example, studies in Los Angeles showed a relationship between medical marijuana dispensaries and rising marijuana- related hospitalizations (Mair et al. 2015). If marijuana use rises, abuse and dependence will also increase. California’s public health and substance abuse treatment system s would feel the impact . Emergency department data show that from 2008 to 2014, visits with drugs as the primary diagnosis increased 40,942. Of these, t he share of marijuana-related primary diagnoses increased a few percentage points. PPIC.ORG Regulating Marijuana in California 22 FIGURE 5 Emergency department visits in California: Marijuana -related prima ry diagnoses increased as a share of all drug -related primary diagnoses SOURCE: Emergency Department ICD- 9-CM Code Frequencies , California Office of Statewide Health Planning and Development (OSHPD) . US Substance Abuse and Mental Health Services Administration data show treatment facility admissions in which marijuana was the primary substance of abuse fell from 33,691 in 2012, equal to 20.5 percent of all admissions, to 24,022 in 2014, or 15.3 percent of all admissions. Although marijuana treatment admissions decreased, the under -21 share rose to 53.9 percent in 2014 from 10.4 percent in 2012 (Substance Abuse and Mental Health Services Administration 2012, 2015). This suggests that marijuana legalization may not have a large overall impact on California’s drug treatment system , but that client age distribution could change. 50 T hese statistics only indicate the primary substance o f abuse. Many heroin and amphetamine users also use marijuana. Such secondary marijuana use may increase with legalization. RAND ha s estimated that legalization would increase state treatment costs by $2 million to $5.6 million (Kilmer et al. 2010; Pacula 2010). H istorically, about half of all treatment referrals in which marijuana was the primary substance of abuse have come from the criminal justice system (Pacula 2010). In the wake of Proposition 47, these referrals have already begun to fall in Califor nia. If recreational marijuana use becomes legal, California must develop strategies to minimize patterns of use that could lead to abuse and dependence. California’s embrace of the Affordable Care Act , including Medicaid expansion and a state wide health insurance m arketplace, e nsures wide coverage of substance abuse treatment ( US Department of Health and Human Services 2013). To build on this, California should enforce coverage mandates, address adequacy of insurer network s, and implement Medicaid reimbur sement rates acceptable to providers. California also must continue to finance treatment programs for uninsured individuals. Under legalization, young people who abuse marijuana will still be committing a crime . The state should direct them to treatment and diversion programs r ather than prosecuting them. Because adult referrals for marijuana treatment from the criminal justice system have fallen, mechanisms to identify those who need treatment should be expanded. One such avenue could be the Screening, Br ief Intervention, and Referral to Treatment (SBIRT) 50 Interestingly, the number and proportion of drug treatment admissions with heroin or methamphetamine the primary substances of abuse increased during this period . T hese two drugs now represent 55% of all drug treatment admissions in California . 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 2008 200920102011201220132014 Primary diagnoses Drug-related primary diagnoses Marijuana-related primary diagnoses PPIC.ORG Regulating Marijuana in California 23 approach in primary health care facilities, hospital emergency rooms, and other settings. SBIRT is a comprehensive, integrated public health practice that provides early intervention and treatment in case s of substance ab use and for those at risk . Governance and Accountability Legalizing recreational marijuana would be a far -reaching policy change. L ittle research is available on its potential effects on usage rates , public health, and safety (Caulkins et al. 2012) . Studies have examined the social cost of illicit drug abuse, focusing on health, crime, and lost productivity (National Drug Intelligence Center 2011) , but it isn’t clear how those findings would translate to a legal market . Legalization would bring California into a brave new world filled with uncertainties. California’s marijuana regulatory structure should incorporate a feedback mechanism to determine what is work ing and what is not. Such a mechanism would track key metrics, conduct analyses, and perform sophisticated research to show both the intended and uni ntended results of policy . Good governance will require effective monitoring of outcomes so that adjustments can be made as needed. The new status of recreational and medical mar ijuana is not just a legal change. It is a system ic change with an impact extending well beyond the criminal justice system . Collection and analysis of data on p rocesses and outcome s will help regulators and policymakers adapt and bet ter serve the public i nterest. A good feedback mechanism is transparent . It should show clearly how a program or policy is perform ing by comparing results with expectations (Simeone et al. 2005). 51 Outcome evaluation, that is, evaluation of performance , should be quantitative, scientific, and based o n data, preferably from publicly available sources. The feedback mechanism should also include qualitative, descriptive, and detailed process evaluations—that is, evaluations of a dministrative systems , whether newly created or modifi cations of existing systems. To date, l ittle information is available to support recreational marijuana process evaluations. In Washington and Colorado, formal documentation is scant on how regulatory change was determined and implemented. Colorado organi zed a task force to implement recreational marijuana, but no process evaluation has been produced on how task force recommendations were carried out. Washington ’s legalization i nitiative included a provision requiring process and outcome evaluations, the only state with such a requirement written into its marijuana law . 52 Washington recently released a preliminary implementation report that spells out plans for outcome evaluations (Darnell 2015). Washington ’s evaluation efforts represent good governance . They help ensure t hat the state’s marijuana experiment meets public expectations and generates information useful to policymakers inside and outside the Washington (Wallach 2015). California should act sooner rather than later to set up a data collection system to track processes and outcomes. It should also plan regular performance evaluations , which will help guide policy refinements. 53 The state took a step forward when it established a governance framework as part of MMRSA . That legislation is a start, but high - 51 Evaluation is best structured using logic models that start with inputs and work their way through outputs and outcomes to determine whether progress matches objectives (Millar et al. 2001). The Washington State Institute for Public Policy released a logic model explaining how it will conduct a benefit -cost study that identifies the data and their sources that Initiative 502 requires in 2017. It also released a logic model that describes the interrelationships among inputs from seed -to - sale, prevention and education, consumption, and consequences that will support the benefit- cost study and other economic impact studies. 52 Part IV of Initiative 502, Washington’s legalization law, includes a provision for a dedicated marijuana fund that, among other things, earmarks all marijuana excise taxes, license fees, penalties, forfeitures, and other income from marijuana- related activities for biennial youth drug use surveys, a benefit -cost evaluation and outcome studies by the Washington State Institute for Public Policy , an Internet public education site with information about the health and safety risks posed by marijuana use , prevention programs, a hotline providing referrals to trea tment, and other public education activities. 53 Researchers on all sides of the issue should have access to reliable data. The objective is not to keep researchers happy, but instead to give researchers means to keep policymakers and the public happy. PPIC.ORG Regulating Marijuana in California 24 quality information requires that data be collected and made available for analysis. T he kinds of information that should be collected are generally straightforward . 54 Table 4 presents examples. TABLE 4 Examples of data collection to monitor imple mentation Regulatory area Data elements Cultivation and production Number of business licenses; business characteristics such as location, size, number of employees; major business cost categories ; production tracking by product and potency ; environmental violation citations. Sales, consumption, and possession Population-based drug incidence and prevalence estimates; measures of attitudes and perceived risk from drug use; drug product prices along the supply chain; drug purities at point of sale for marijuana and marijuana-infused products. Taxes and finance Revenues projected and realized by revenue source, such as tax types, license fees, fines, penalties; total sales . Public health and safety Drugged driving arrests and accidents; treatment admissions; emergency department admissions; calls to poison control; school dropout rates, expulsions, and absenteeism; marijuana arrests; public use citations. Governance Number of regulatory inspections; regulatory workforce size; number and types of violations; budget earmarked for data collection and research; process and outcome studies on benefit s and cost s, social cost s, diversion, demand , and other topics. The table does not present an exhaustive list, but it represents the minimum that should be in a public data set. It took 20 years following passage of Ca lifornia’s medical marijuana initiative before comprehensive market regulat ion was put in place. As a result, we lack basic information about the state’s medical marijuana market. How much is sold? At what price and in what form? Expanding the market without building in reporting requirements would severely hamper the state’s ability to monitor legal marijuana’s impact. Effective data collection instill s a capacity for change in th e marijuana governance structure. Both Washington and Colorado significantly modified marijuana regulation during the first year of implementation. Delegating the specifics of regulations to an oversight body and ensuring that resources are available to su pport it are ways to build in this capacity. Most important ly, high -quality data and analysis help ensure that polic ies are based on clearly defined goals. California must also decide whether to set up a unitary system in which the same rules govern medical and recreational marijuana licensure and taxation. S eparate structures could make the medical market more attractive than the recreational market , encouraging “cheaters” who use medical marijuana for recreation. Colorado separates medical and recre ational sales, though regulations are similar for both. The key difference is a lower effective tax on medical marijuana. Colorado sales figures indicate that the medical market accounts for more than 40 percent of marijuana sales. 55 This suggest s some recr eational consumers are buy ing medical marijuana because it costs less. L ike California, Washington had a robust, relatively unregulated medical marijuana market for a number of years. Washington’s recreational law did not originally take into account medical retailers. As a result, two markets with different regulations exist side-by- side. In 2015, Washington began reconciling the two regulatory systems. 54 H opefully, data gathering and analysis will be financed with dedicated funds collected from the marijuana industry, although a case can be made that state general funds should be used to avoid conflicts of interest. 55 This figure is based on reported state retail sales tax receipts from medical and recreational stores. In the law’s first months, medical sales accounted for a majority of total sales. Once recreational retailers were more fully operational, the medical share dropped. PPIC.ORG Regulating Marijuana in California 25 Eventually it will create one market with a single tax schedule. Medical users will be able to apply for exempt ion from the marijuana sales tax. For transparency and simplicity, California should establish recreational marijuana market regulations that adopt most features of the medical market. MMRSA represents a constructive step in developing a plan for regulating recreational marijuana. It requires licensing of all commercial cannabis activity, establishes a Bureau of Medical Marijuana Regulation , sets environmental protections , promulgates standards for producing and labeling marijuana -infused produ cts, and imposes o ther requirements. Still, the simpl est approach would be to create a single system for producing and selling marijuana in California. I f necessary, exceptions can be made for medical consumers. A single system would be easier to understand and enforce. California regulates f ew, if any, other products under two different sets of laws based on product use. 56 We recommend a unified system, in keeping with the idea that a restrictive and transparent approach is best and can be modified as needed. 56 We could not think of an y. Alcohol, tobacco, and gasoline are subject to oversight by different government agencies. But the product itself is treate d the same. Gambling provides the closest parallel. Lotteries, casino gaming, and horse racing are treated separately. In the case of gambling though, the products are different, although the purpose is the same. PPIC.ORG Regulating Marijuana in California 26 Conclusion Californians will shortly consider whether to permit recreational use of marijuana. Such a decision touches many policy sectors. This report g roups those sectors into five regulatory areas, e ach with distinct objectives. T he Washington and Colorado experiences offer recreational marijuana regulatory models. If California heads down the same path, we can learn from them . We offer recommendations for California based on the Washington and Colorado examples. The most importan t lesson learned is that recreational marijuana legalization should start with a relatively tight regulatory strategy —one that limits access at the outset. California can build in the capacity to ease regulations in the futur e as we learn from experience. Table 5 shows what this strategy might look like in practice in the five regulatory areas . TABLE 5 Elements of a tightly regulated marijuana market. Regulatory area Recommendations Future Flexibility Cultivation and production Limited number of licenses and size of cultivations, seed- to-sale tracking , strict environmental and water use requirements Expandable license availability, technology used to improve tracking systems Sales, use, and consumption Sales limited to individuals 21 and older, retail outlets restricted to marijuana- only stores, home grows prohibited Expansion of the number of outlets, legalization of home growing Taxes and finance A sales and/or excise tax as a percentage of selling price Tax rates raised or lowered as market performance and social impact indicate Public health and safety Aggressive prevention/education campaign aimed at youth, funded research to develop an impairment standard, substance abuse treatment for the uninsured New research-based impairment standards and prevention efforts Governance A single regulatory system that requires reporting and data collection across many indicators , buil t in reporting and impact assessment Adjustable data and reporting systems, determination of whether exceptions needed for medical consumers If California legalizes recreational marijuana, the state should develop a single regulated market, combining both medical and recreational marijuana. Such a market is most consistent with the approach we recommend, and would be simpler , more transparent , and easier to supervise . Building in strong oversight and data collection will help ensure that future changes are based on research and analysis. Very little is known about California’s illegal marijuana market and surprisingly little information is available on the medical market —even though medical marijuana has been legal for nearly 20 years. The lack of information makes it impossible to perform a rigorous analysis of proposed regulation s. T he state would be well served to err on the side of more-restrictive regulat ion. A tighter, smaller market would make California’s marijuana law easier to enforce and reduce the likelihood that legal marijuana would be diverted to other states or end up in the hands of you ng people. Of course, a highly regulated legal market would be accompanied by a robust illegal market. Still, the arguments for a relatively restricted market outweigh the arguments for a more lightly regulated market. The fundamental fact is, from a political perspective, it wi ll be easier to loosen a tight market, than tighten a loose one. PPIC.ORG Regulating Marijuana in California 27 REFERENCES Anderson, M. David, Benjamin Hansen, Daniel I. Rees . 2013. “ Medical Marijuana Laws, Traffic Fatalities, and Alcohol Consumption. ” Journal of Law and Economics 56, 2: 333 -369 . A rmentano, Paul. 2013. “ Should Per Se Limits Be Imposed For Cannabis? Equating Cannabinoid Blood Concentrations with Actual Driver Impairment: Practical Limitations and Concerns.” Humboldt Journal of Social Issue 35 (2013). American Society of Addiction Medicine Board of Directors. 2015. Public Policy Statement on Marijuana, Cannabinoids, and Legalization . 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California Leg islative Analyst ’s Office. 2015. “Fiscal impact of proposed statutory initiat ive related to the cultivation, possession, and sale of Marijuana .” AG File 15 -0036. Letter from LAO Mac Taylor and Michael Cohen to Attorney General Kamala Harris. ( December 22). California State Board of Equalization. 2015. Annual Report, FY 2012 -13: Statistical Appendix . California State Board of Equalization. 2009. Staff Legislative Bill Analysis: AB 390. (July 15). California State Legislature. 2015. Assembly Bill No. 266 . (October 9). Caulkins, Jonathan, Angela Hawkens, Beau Kilmer, Mark Kleiman. 20 12. Marijuana Legalization: What Everyone Needs to Know . Oxford University Press. Caulkins, Jonathan, et al. 2015. The Marijuana Legalization Debate: Insights from Vermont . RAND. Clockburn, Chloe, Daliah Heller, Gabriel Sayegh. 2013. Healthcare Not Handcuffs . Drug Policy Allianc e. Colorado Department of Revenue. 2015. Colo rado Sales/Use Tax Rates. Colorado Department of Revenue Taxpayer Service Division. DR 1002. Colorado Proposition AA . Taxes on the Sale of Marijuana. 2013. Cole, James M. 2013. “ Memorandum to All U.S. Attorneys: Guidance Regarding Marijuana Enforce ment.” U.S. Department of Justice. (August 29). Cole, James M. 2014. “ Memorandum to All U.S. Attorneys: Guidance Regarding Marijuana Related Financial Crimes .” U.S. Department of Justice . (February 14). Couper, Fiona. 2015. “ Analysis of suspected impaired driving cases .” Washington State Patrol . (June 15). Darnell, A. J. 2015. I-502 Evaluation Plan and Preliminary Report on Implementation . Washington State Institute for Public Policy. Drug Enforcement Administration . 2014. 2014 National Drug Threat Assessment Summary . Ennabe v. Manosa. 2014. Supreme Court of California S189577. Retrieved November 30, 2015 Drug Policy Alliance . 201 5 Status Report: Marijuana Legalization in Colorado After One Year of Retail Sales and Two Years of Decriminalization . Financial Crimes Enforcement Network . 2014. Guidance: BSA Expectations Regarding Marijuana- related Businesses. (February 14). Gieringer, Dale H. 2006. “ The Origins of Cannabis Prohibition in California .” Contemporary Drug Problems, 26 (2): rev. June 2006 . Gravelle, Jane, and Sean Lowry . 2014. Federal Proposal to Tax Marijuana: An Economic Analysis . Congressional Research Service. (November 13). Grotenhermen F. et al. 2007 . “ Developing Limits for Driving Under Cannabis .” Addiction 2007 102 (12). Hasin, Deborah S. et al . 2015. “Prevalence of Marijuana Use Disorders in the United States Between 2001- 2002 and 2012-2013.” J AMA Psychiatry 72 (12): 1235- 1242. PPIC.ORG Regulating Marijuana in California 28 Hasin, D.S ., Melanie Wall, Katherine M . Keyes, Magdalena Cerdá, John Schulenberg, Patrick M . O'Malley, Sandro Galea, Rosalie Pacula, Tianshu Feng . 2015. “ Medical marijuana laws and adolescent marijuana use in the USA from 1991 to 2014: results from annual, repeated cross -sectional surveys. ” The Lancet 2 (7): 601– 608. Hwang, Maria S. 2015. “ Interim Guidance on the Failure to Deposit Penalty under Section 6656 for Taxpayers Unable to get a Bank Account .” Internal Revenue Service. (June 9). Johnson, Gene. 2015. “ After year of Washington legal pot sales, taxes top $70M .” Associated Press. (July 4). Johnson, Knowlton, Matthew Courser, Ha rold Holder, Brenda Miller, Kristen Ogilvie, Roland Moore, David Collins, Bob Saltz. 2007. “ A Community Preventio n Intervention to Reduce Youth From Inhaling And Ingesting Harmful Legal Products .” Journal of Drug Education 37 (3): 227– 247. Jones, Jeffrey M. 2015. “ In U.S., 58% Back Legal Marijuana Use.” Gallup. (October 21). K ilmer, Beau, Jonathan Caulkins, Rosalie Pacula, Robert MacCoun, Peter Reuter . 2010. Assessing How Marijuana Legalization in California Could Influence Marijuana Consumption and Public Bu dgets. RAN D. King County Bar Association. 2005. “ Effective Drug Control – Toward A New Legal Framework .” KCBA Drug Policy Project. Lacey , John H. , Tara Kelley -Baker, Eduardo Romano, Katharine Brainard, Anthony Ramirez . 2012. Results of the 2012 California Roadside Survey of Nighttime Weekend Drivers’ Alcohol and Drug Use . Pacif ic Institute for Research and Evaluation . Lofstrom, Magnus, and Brandon Martin. 2015. “ Public Safety Realignment: Impacts So Far.” Public Policy Institute of California. Mair, Christina , Bridget Freisthler, William R. Ponicki, Andrew Gaidus . 2015. “The impacts of medical dispensary and neighborhood ecology on marijuana abuse and dependence. ” Drug and Alcohol Dependence 154: 111 -116. Massey, Ray , and Tom Payne. 2015. “ Hidden menace of the drivers high on drugs: Six out of ten motorists are failing new roadside tests .” Daily Mail. (May 24 ). McCoun, Robert J . 2010. “California Assembly Bill 390 and the Tax and Regulate Cannabis Ballot Initia tive: What Would Happen if California Legali zed Marijuana?” Presentation at the fourth annual conference of the International Society for the Study of Drug Policy . Millar Annie, John Carnevale, Ronald Simeone . 200 1. “Logic Models: A Systems Tool for Performance Measurement.” Evaluation and Planning 24 (1): 73 -81. National Drug Intelligence Center . 2011. The Economic Impact of Illicit Drug Use on American Society . National Institute on Alcohol Abuse and Alcoholism . 2014. Underage Drinking: Underage Purchasing of Alcohol . National Research Council and Insti tute of Medicine, Committee on Developing a Strategy to Reduce and Prevent Underage Drinkin g. 2004. Reducing Underage Drinking: A Collective Responsibility . National Academies Press. Newsom, Gavi n, Keith Humphreys, and Abdi Soltani . 2015. “Pathways Report: Policy Options for Regulating Marijuana in California .” Blue Ribbon Commission on Marijuana Policy. Ogden, David. 2009. Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana. Memorandum for Selected United States Attorneys. (October 19). Oglesby,P. 2015. Supplemental Thoughts about Revenue from Marijuana in Vermont . Pacula, R osalie. 2010. Examining the Impact of Marijuana Legalization on Harm Associated with Marijuana Use . RAND . Pacula, Rosalie , Beau Kilmer , Alexander Wagenaar, Frank Chaloupka , Jonatha Caulkins . 2014. “Developing Public Health Regulations for Marijuana: Lessons from Alcohol and Tobacco.” American Journal of Public Health . 104 (6): 1021 -1028. Paul, Jesse. 2015. “ Denver police issue 7 citations for underage marijuana sales .” The Denver Post. (September 30). Phillips, Richard . 2015. Issues with Taxing Marijuana at the State Level . The Institute on Taxation and Economic Policy. Ramaekers, Johannes , Gerhold Kauert, Peter van Ruitenbeek, Eef L . Theunissen, Erhard Schneider , Manfred R . Moeller . 2006 . “Cognition and motor control as a function of Delta9-THC concentration in serum and oral fluid: limits of impairment. ” Drug and Alcohol Dependence 85 (2) : 11 4– 122. Rocky Mountain High Intensity Drug Trafficking Area. 2015. The Legalization of Marijuana in Colorado: The Impact . Vol 3, September. Rusche, Sue, and Kevin Sabet. "What Will Legal Marijuana Cost Employers?." National Families in Action. Sab et, Kevin A. 2013. Reefer Sanity: Seven Myths about Marijuana . Beaufort Books. PPIC.ORG Regulating Marijuana in California 29 Santos, Melissa. 2015. “ Puff test for pot use will be reality within a year, WSU researchers say. ” The News Tribune. (October 22). Simeone, Ronald, John Carnevale , Annie Millar . 2005. “A Systems Approach to Performance -Based Management: The National Drug Control Strategy .” Public Administration Review 65 (2 ): 191– 202. Smiley, A. 1999. “ On road and driving simulator studies. ” In The Health Effects of Cannabis , ed. H arold Kalant, W illiam Corrigal l, Wayne Hall, R eginald Smart ( Addiction Research Foundation). Substance Abuse and Mental Health Services Administration, Center for Behavioral Health Statistics and Quality . 2015. Treatment Episode Data Set (TEDS) . Quick Tables based on administrative data reported by s tates through July 6, 2015. Substance Abuse and Mental Health Services Administration, Center for Behavioral Health Statistics and Quality . 2010, 2011, 2012, 2013 . National Survey on Drug Use and Health. U.S. Bureau of the Census. 2015. 2014 Annual Survey of State Government Tax Collections . U.S. Department of Commerce. U.S. Department of Health and Hu man Services. 2013. “10 health care benefits covered in the Health Insurance Marketplace.” https://www.healthcare.gov/blog/10 -health -care-benefits -covered-in-the -health -insurance -marketplace/ Wallach, Philip . 2014. Washington’s Marijuana Legalization Grows Knowledge, Not Just Pot: A Report on the State’s Strategy to Assess Reform . The Brookings Institution. Washingt on State Legislature. 2011. Initiative Measure No. 502. (July 8). Washington State Liquor and Cannabis Board. 2015. “ Marijuana Compliance Checks: 18 of 157 recreational marijuana stor es sell to minors.” (July). Washington State Liquor and Cannabis Board. 2015. “ Board to increase number of retail marijuana stores following analysis of marketplace.” (December). Wyatt, Kristen. 2015. “ Colorado pulls in $76M in marijuana taxes and business fees for 2014 .” Associated Press. (February 10). PPIC.ORG Regulating Marijuana in California 30 ABOUT THE AUTHOR S Patrick Murphy is director of research and a senior fellow at the Public Policy Institute of California, where he holds the Thomas C. Sutton Chair in Policy Research. His research focuses on education financing and manage ment in both K–12 and higher education. He is a professor of politics at the University of San Francisco, where he served as the director of the McCarthy Center for Public S ervice. His work has been published by PPIC, the Center for American Progress, the Thomas B. Fordham Institute, the Center on Reinventing Public Education, the Berkeley Center for Studies in Higher Education, and RAND. Previously, he worked for RAND and at the Office of Management and Budget in Washington, DC. He holds a PhD from the Uni versity of Wisconsin–Madison and a master’s of public affairs from the University of Texas –Austin. John Carnevale is p resident of Carnevale Associates, LLC, a public policy firm that offers guidance to governments, organizations, and communities as they co nfront the public policy and program challenges of the 21st century. He has consulted at the local, state, national, and international level on drug policy and criminal justice issues. Dr. Carnevale has served three administrations and four "Drug Czars" wi thin the Executive Branch of the US Government. At the White House Office of National Drug Control Policy (ONDCP), he directed the formulation of the President's National Drug Control Strategy as well as the federal drug control budget. Dr. Carnevale is re cognized as playing a key role in directing policy research that shifted the primary focus of the Nation's Drug Control Strategy from supply to demand reduction. Dr. Carnevale has also worked as a researcher at the Office of Management and Budget and in th e U.S. Department of the Treasury. Dr. Carnevale received his PhD in Economics from the Maxwell School of Syracuse University. ACKNOWLEDGEMENTS The authors would like to thank the reviewers of an earlier version of this report, including Rosalie Pacula, A bdi Soltani, Magnus Lofstrom, Lynette Ubois , and Paul Warren . The final draft benefited greatly from Sam Zucker man’s editorial assistance. Finally we want to acknowledge the government officials, advocates, individuals involved in the marijuana industry, a nd others in California, Colorado, and Washington who were patient and took the time to answer our questions and advance our understanding of this complicated issue . Any errors remain our own. PUBLIC POLICY INSTITUTE OF CALIFORNIA Board of Directors Donna Lucas, Chair Chief Executive Officer Lucas Public Affairs Mark Baldassare President and CEO Public Policy Institute of California Ruben Barrales President and CEO GROW Elect María Blanco Executive Director Undocumented Student Legal Services Center University of California Office of the President Louise Henry Bryson Chair Emerita, Board of Trustees J. Paul Getty Trust A. Marisa Chun Partner McDermott Will & Emery LLP Phil Isenberg Vice Chair, Delta Stewardship Council Mas Masumoto Author and Farmer Steven A. Merksamer Senior Partner Nielsen, Merksamer, Parrinello, Gross & Leoni, LLP Gerald L. Parsky Chairman Aurora Capital Group Kim Polese Chairman ClearStreet, Inc. Gaddi H. 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It does not take or support positions on any ballot measures or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office. Short sections of text, not to exceed three paragraphs, may be quoted without written permission provided that full attribution is given to the source. Research publications reflect the views of the authors and do not necessarily reflect the views of the staff, officers, or board of directors of the Public Policy Institute of California. PPIC.ORG Regulating Marijuana in California 3 Introduction 5 H ow Did We Get Here? 6 California’s Evolving Marijuana Law 6 Regulation and Trade -offs 9 Cultivation and Production 10 Sales, Use, and Consumption 13 Taxes and Finance 15 Public Safety and Public Health 17 Governance and Accountability 23 Conclusion 26 References 27 A bout the A uthors 30 Acknowledgements 30 T echnical appendices to this paper are available on the PPIC website: www.ppic.org California led the nation in 1996 when it declared that marijuana use for medical purposes would no longer be a crime. Twenty years later, four states and the District of Columbia have legalized recreational marijuana use. In November 2016, Californians will be asked whether the state should follow suit. This report does not consider the wisdom of marijuana legalization. Instead, it takes the view that, if recreational marijuana use becomes legally sanctioned, then the debate must turn to how to design regulations that reconcile important, but differing policy goals. These include, among others, limiting the impact of the illegal marijuana market, reducing harm to public health and safety, and raising revenue for the state. The report explores the approach Washington and Colorado have taken to regu lating recreational marijuana markets. These two states have histories of legal recreational marijuana that, though brief, are the longest in the nation. What lessons can be gleaned from these experiments? Both states have designed mechanisms to track legal cultivation and production, thereby reducing the diversion of marijuana to the illegal market. They also tax marijuana transactions, collecting tens of millions of dollars in revenue. And it appears that neither overall use nor use by young people has ri sen dramatically. However, as in California, levels of use were already higher in those states than in the rest of the country. To limit the impact on public safety, both Washington and Colorado established legal definitions of drugged driving. Since then, in both states, greater numbers of people have been charged with driving under the influence. Nonetheless, it is impossible to determine whether those increases mean drugged driving has become more prevalent or that law enforcement is more vigorous. In addition, the change in marijuana’s legal status challenges drug abuse prevention specialists to develop effective messages. The short experience with legal recreational marijuana in Colorado and Washington and the lack of data on California’s marijuana market make it difficult to derive policy recommendations. However, from a governance perspective, it is possible to draw some general lessons for California. Three in particular stand out: (1) Both Colorado and Washington significantly adjusted marijuana regulation shortly after legalization. We suggest that California approach legalization with an eye toward flexibility. The regulatory process should be designed to facilitate needed changes. (2) Such an adaptable regulatory model will require a mechanism for collecting data on the marijuana market and evaluating the consequences of use. A strong and transparent reporting system will help ensure that future changes are based on solid research and analysis. (3) Finally, this is a venture into uncharted territor y, and marijuana SUMMARY CONTENTS PPIC.ORG Regulating Marijuana in California 4 remains illegal under federal law. These considerations suggest that California should err on the side of caution and adopt a relatively restrictive regulatory model for both the recreational and medical markets. A tight, single market wi ll make marijuana laws easier to enforce and to reduce diversion to other states and underage users. To be sure, a highly regulated legal market will undoubtedly be accompanied by a robust illegal market. From a political perspective though, it will be eas ier to loosen a tight market than to tighten a loose one. PPIC.ORG Regulating Marijuana in California 5 Introduction Amid changing perceptions about the danger of marijuana , states across the nation have relaxed and, in some cases, effectively eliminated legal restrictions against marijuana use. California was a leader in this shift 20 years ago when it passed Proposition 215, becoming the first state to allow possession of small amounts of marijuana for medical use. Since then, 23 other states plus the District of Columbia , representing about half the nation’s population, have enacted laws permitting medicinal marijuana use . Four of these states plus the District of Columbia, accounting for almost 6 percent of the U.S. population, have gone a step further by legaliz ing recreational use. A range of factors is driving these changes. These include the perception that the nation’s so- called war on drugs has failed , the disproportionate impact of drug enforcement on low -income and minority communities , and a broader criminal justice refo rm agenda . Whatever the reason, the public’s attitude toward legalization is changing. Today, 58 percent of Americans believe that marijuana should be legal , compared with about 20 percent two decades ago. 1 In California, 55 percent of likely voters support legal recreational marijuana, an increase of 6 percentage points over five years (Baldassare, Bonner, and Lopes 2015). These shifting attitudes could lead as many as 12 states to put proposals before vote rs to legalize recreational marijuana use. In California, a legalization initiative similar to the proposed Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) is likely to appear on the November 2016 ballot. If all 12 states vote to eliminate mari juana prohibitions, almost 60 percent of Americans will live in places where recreational use is permitted (see Technical Appendix A ). This major policy shift raises an important challenge: How should we regulate an industry that used to be illegal under state law and remains illegal under federal law? This report does not address the wisdom of marijuana legalization. Instead it asks, if legalization is to become a fact of life, then how should marijuana be regulated? And what are the trade -offs inherent in different approaches to legalization ? These questions have arisen before. In 2010, t he last time recreational marijuana use was on the California ballot, the RAND Corporation analy zed the potential impact on consumption and public budgets (Kilmer et al. 2010) . 2 In March 2015, the Blue Ribbon Commission on Marijuana Policy, led by the lieutenant g ove rnor and the ACLU of California , pe rformed an in -depth investigation of legalizing recreational use . Th e commission identified youth education and protection, public safety, and taxes as key areas of concern ( Newsom et. al. 2015). This report builds on those works by outlining some of the regulatory and public policy questions raised by legalization . We begin by reviewing the evolution of California’s approach to regulating marijuana and the complicated relationship between state and federal law. The report then considers what kind of fram ework and regulatory system would best achieve the varying goals of marijuana regulation. In particular, this report examines the trade- offs associated with different regulatory regimes based on the examples of Washington and Colorado, the two states with the most experience implementing recreational marijuana laws. We find that the potential effects of legalizing recreational marijuana are less predictable across many dimensions than other changes in public policy. If C alifornia m akes t his change, policymakers should establish a n outcome -oriented regula tory regime that identif ies specific objectives. Such an approach, combined with a monitoring capacity to measure social and economic effects, will allow policymakers to implement construc tive regulatory changes. 1 This level ties Gallup’s high point in its 46- year history of polling on this subject. See Gallup Analytics from October 2015 . 2 RAND more recently published an analysis of the key policy que stions surrounding legalizing marijuana in Vermont. While Vermont is in many ways a different state than California, much of the analysis and many of the issues they raised are common to all states (Caulkins et al. 2015 ). PPIC.ORG Regulating Marijuana in California 6 How Did We Get Here? In 1996, California enacted Proposition 215, becoming the first state to legalize medical marijuana. Two decades later, the state has large, well -established groups of growers, processo rs, and retailers. After California legalize d marijuana for medical use, 23 other states and the District of Columbia followed suit. Subsequent moves by Colorado and Washington to permit recreational use of marijuana were viewed as experiments that authorities in the U S and other nations could learn from . However, what were originally deemed isolated experiment s appear to have been supplanted by a national movement for marijuana legalization . If all the jurisdictions currently considering legalizing recreational marijuana do so, then, by the end of 2016, almost 60 percent of the U S population will live in places where medical use, recreational use, or both are permitted (Techn ical Appendix A ). Even if legal recreational use is still considered an experiment, no one can deny its scale. This puts the question of how best to regulate this new industry at the forefront of the policy agenda . And it raises the issue of whether the federal government should combat the movement or respect the wishes of the states and their constituents. Regardless of what the federal government does , California ns are weighing whether to move marijuana on the regulatory spectrum by voting on the question of legalizing marijuana for recreational use. California’s Evolving Marijuana Law Marijuana law has been evolving for more than one hundred years . California first passed legislation restricting its use in 1913. 3 Since th en, the state has made sever al changes to its marijuana laws, sometimes increasing, and at other times relaxing , restrictions (Technical Appendix B ). In 1996, California became the nation’s first state to legalize medicinal use of marijuana. 4 Since then, the state has taken additional steps to reduce penalties for unauthorized marijuana possession despite voter rejection in 2010 of a measure to legalize recreational use. 5 Recent changes have had significant consequences. A rrests for marijuana possession in California dropped by more than 80 percent in 2011, the year after passage of SB 1449, which made unauthorized possession of less than one ounce of marijuana similar to a traffic violation . In 2011, public safety realignment (AB 109) shifted responsibility for supervising many low -level offenders from state prisons to county jails in an attempt to reduce 3 Amendment to the state’s Poison Law. For further reading see Gieringer 2006. 4 California Proposition 215 passed in 1996 with 55.6 percent of the vote. 5 Proposition 19 garnered 46.5% of the vote in the fall 2010 election. Marijuana Legalization in the US after 2016? Twenty-four states and the District of Columbia have laws permitting medical use of marijuana. A s of 2015 , Alaska; Colorado; Oregon; Washington ; the District of Columbia ; and Guam; plus Portland and South Portland, Maine ; and Detroit, Ferndale, Flint, Jackson, and Lansing, Michigan ; have legalized recreational marijuana use . That picture could change dramatically after the 2016 elections. L egalization referendums are seeking ballot access in another 11 states.  154 million people , 48.3% of the US population, currently live in jurisdictions with legalized medical marijuana use .  18 million people, 5.6% of the population, live in jurisdictions where marijuana is leg al for both recreational and medical purposes .  After 2016, another 100 million people, 31.4% of the population, could live in states permitting recreational marijuana use.  In total, 185 million people, 58% of the population, could live in jurisdictions wi th legal medical and/or recreational marijuana use by the end of 2016. PPIC.ORG Regulating Marijuana in California 7 prison overcrowding . One consequence was that about 18,000 non- serious, non-violent offenders were redir ected from incarceration, including many serving drug sentences. In 2014, Proposition 47 reclassified a number of felonies as misdemeanors, including drug possession. The law was applied retroactively, reducing county jail populations by 10,000 in the firs t few months, including many drug offenders (Lofstr om and Martin 2015). FIGURE 1 Marijuana misdemeanor arrests dropped dramatically after decriminalizing possession of marijuana SOURCE: State of California Department of Justice . In 2015, California passed three bills to regulate the medical marijuana industry: SB 643, AB 266, and AB 243, known collectively as the Medical Marijuana Regulation and Safety Act (MMRSA) . Coming 20 years after passag e of Proposition 215, the laws established a new Bureau of Medical Marijuana Regulation under the Department of Consumer Affairs and laid out requirements for tracking medical marijuana distribution. The legislation also assigned other departments responsibility for product testing and ensuring that marijuana cultivation is subject to environmental protection. 6 MMRSA envisioned t wo marijuana markets in California — one recreational and one medical. In Colorado, dual markets have co mplicated legalization, while, i n Washington, m erging recreational and medical m arkets has proven difficult. While t he states have moved stead ily toward a less- restrictive approach to marijuana in recent years, the federal story is muddled. Marijuana is illegal under the US C ontrolled Substances Act of 1970 (CSA) and is classified as a Schedule I drug with no medical use . 7 The CSA bans marijuana- related businesses; the possession, cultivation, and production of marijuana -infused products ; and the distribution of marijuana and products derived from it. 6 Different provisions establish responsibilities for the Departm ents of Food and Agriculture, Public Health , Pesticide Regulation, Fish and Wildlife, and the State Water Board. 7 Other schedule I drugs are heroin and LSD. Cocaine, oxycodone, and methamphetamines are schedule II drugs under the CSA as th ey have some medical applications. 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 2005200620072008200920102011201220132014 Arrests MJ Felony (Sale) MJ Misdemeanor (Poss) PPIC.ORG Regulating Marijuana in California 8 Moreover , on two separate occasions the US Supreme Court ruled that the CSA trumps state law.8 That means that the federal government has the option of enforcing US drug law s, creating a climate of legal uncertainty. 9 Although the CSA’s basic prohibition remains in force, the Obama administration’s Justice Department has issued memoranda characterizing enforcement of federal marijuana prohibitions as low priority and instructing federal prosecutors not to take action against individuals complying with state medical marijuana laws. C ongress has inserted similar language in budget bills (see Technical Appendix B ). In essence, the federal government has decided to take a hands- off approach and not enforce anti -marijuana laws under some circumstances. However, the administration’s policy does not carry force of law . Future administrations could shift policy, leaving the question of federal prosecution unresolved . 8 In the 2001 case, United States v. Oakland Buyers Cooperative ( 532 U.S. 483), the court unanimously rejected the notion that medical need was a defense for violating the Controlled Substances Act by selling marijuana, regardless of its status under state law. Four years later, in Gonzales v. Raich (previously Ashcroft v. Raich 545 U.S. 1 2005), the Court ruled 6- 3 that an individual could not legally grow marijuana for medical use regardless of its status under state law. 9 States’ righ ts proponents argue that states have the authority to diverge from federal law regarding regulation and control of marijuana for reasons of public health. See www.kcba.org/druglaw/pdf/summary_s r.pdf. PPIC.ORG Regulating Marijuana in California 9 Regulation and Trade -offs With the looming possibility that Californians will vote to permit recreational marijuana, the challenge facing policymaker s will be to design a regulatory regime . Marijuana regulations will cut across many policy and program areas, including health, public safety, agriculture, environment, revenue collection, parks and recreation, education, and workplace rules. In designing marijuana regulations, authorities must define a set of objectives aligned with the public’ s desire for reform. California, like the states that have acted before it, can pursue several objectives in regulating recreational marijuana (Pacula et al. 2014) . But how can the value of different objectives be measured ? And what if pursu ing one objective works at cross -purposes with another? The ideal approach in comparing different regulatory model s is to systematically weigh costs and benefits. Unfortunately, little is known about how either the medical marijuana market or the illicit market are functioning in California and other states . It is impossible to say with certainty what the impact of key regulatory e lements would be, which makes perform ing a net cost/benefit analysis exceptionally difficult. 10 To be sure, MMRSA passage last year means California will not be starting from scratch . But the law’s provisions haven’t be en fully implemented , so assessment is not yet possible . In this report , we identify elements incorporated in most regulatory efforts to date and analyze them according to specific objectives. F or the sake of simplicity, we group regulatory objectives in five general policy areas: 11  Cultivation, production, and processing . This area focuses on turning marijuana plants into finished products and the sale of those products to consumers.  Sale, consumption, and possession. This area concerns how the state should regulate consumer use. For example, if recreational marijuana is legalized, what rules will apply when consumers possess more than the legal limit?  Taxes and finance . How should marijuana be taxed? Will taxes be base d on price, weight, potency, or other factors ? How will taxes be collected?  P ublic health and safet y. This area concerns minimizing harm to users by limiting abuse. It also covers preventing harm to others from drugged driving or workplace use, for example.  Governance. What is the role of state government in setting policy and enforcing regulations? How c an performance assessment and scientific research guide policy? 10 One recent report attempts to identify the complexities facing employers who are confronted with legal medical or recreationa l marijuana. The findings are qualitative, based on an expert panel’s conclusion that legalization will increase employer costs. ( See Rusche and Sabet 2015). 11 Our categorization is not perfect and their boundaries overlap. PPIC.ORG Regulating Marijuana in California 10 TABLE 1 A simple framework for structuring a r egulatory model Regulatory area Goals Regulatory Examples Cultivation, production, and processing Manage cultivation, limit supply, product standardization, quality control, eliminate diversion, protect the environment Licensure, canopy limits, location (e.g., distance from schools), plant tracking, use of pesticides, em ployee age and criminal history, flower/trim tracking, concentrates/extracts standards, waste management, THC/CBD restrictions, packaging, employee age and criminal history, owner/employee residency requirements, product labeling, warning labels Sale, consumption, and possession Limit access by youth, reduce arrests, eliminate diversion Age restrictions, product sale limits, inventory control, age of seller and employee restrictions , outlet types and density res trictions , product pricing, advertising , nonresident sale/use, hours of operation, advertising, gifting , home grows , use in public , personal possession of amounts above state limits Taxes/finance Limit abuse and dependence, raise revenue, limit illegal markets, prevent diversion Excise taxes; licensure fees; use of proceeds, i.e., general fund and/or earmarking of marijuana tax revenue for prevention, treatment, regulatory enforcement, and research Public health/ public safety Limit abuse and dependence, quality control, prevent impaired driving Use and driving, workplace use, prevention and treatment programs, use/consequences monitoring and evaluation Governance Oversee and ensure compliance, mount public information campaign focused on legalization costs and benefits State regulatory oversight, regulatory enforcement, marijuana policy outcome monitoring, regulatory flexibility NOTES: Table 1 is intended to provide examples. See Technical Appendix C for a more detailed description of the framework. We discuss below each of these areas in greater detail, draw ing from the experiences of Washington and Colorado— the two states with the longest histories of regulat ing recreational marijuana. We examine the regulatory options available to California based on the principle that marijuana rules should be simple and transparent while allowing for future modification. In each of the five areas , we identify an approach consistent with a tightly regulated market that limits the scale of operations and participat ion. If regulations based on this standard prove too tight, they c an be loosened at some future point. Cultivation and Production The federal government does not want marijuana grown and sold legally in California to go to other states. In addition, both federal and state officials want to prevent criminal enterprises from benefiting from legally produced marijuana . Governments at all levels also want to limit access to marijuana by minors. 12 Consequently, California would benefit from robust regulation of the entire supply chain , including cultivators, producers, wholesalers, and retailers, as well as regulation of product transportation along the supply chain. A significant and relatively unique challenge facing California is the size of its marijuana market. Currently, marijuana is legally grown and processed solely for the medical marijuana market. But California is also a large supplier to the illegal market outside the state (D rug Enforcement Administration 2014). Therefore, incentives must be created to draw participants into the legally licensed supply chain. In addition, to mitigate concerns about diversion, a “seed -to -sale” tracking system is needed to monitor the quantity of marijuana supplied to Californians for medical and recreational purposes. Colorado implemented its Marij uana Inventory Tracking System (metrc™) to track supply and prevent diversion. Washington State uses BioTrackTHC ™ to track legal marijuana cultivation, production, testing, transportation, destruction, and retail sale . If California creates robust licensing and tracking systems, it will be putting its best 12 Four of the eight guidelines in a 2013 federal memorandum, known as the “Cole Memo,” involve preventing the: 1) distribution of marijuana to minors; 2) revenue from the sale of marijuana going to criminal enterprises; 3) diversion of marijuana from states where it is legal to other states; and 4) state -authorized marijuana activity from being used to cover trafficking of illegal drugs or other illegal activity. The remaining guidelines apply to marijuana possession or growth on federal lands ; drugged driving ; and preventing violence and use of firearms in cultivation and distribution of marijuana. PPIC.ORG Regulating Marijuana in California 11 foot forward in following federal guidance. Of course, stiff penalties to suppress the illegal market are essential for California ’s legal market to succeed. 13 L icensing is a complicated question. How the market is licensed should depend on how much control and oversight California wants to exercise . The first issue is how to structure the marijuana industry. Should licensing encourage a vertically integrated mark et in which businesses operate throughout the supply chain , from c ultivation, production, and processing to retail sale ? Or should the industry be horizontally integrated, with businesses licensed in only one part of the supply chain? Vertical integration allows businesses to manage access to inputs throughout the production chain, enabling better cost control and more efficient delivery of product s to consumers. But if the regulatory objective is to encourage wider participation in the marijuana industry, horizontal integration may be preferable. A horizontally structured industry could be designed to favor small businesses, while a vertically integrated industry might result in fewer businesses controlling the industry. Washington has opted for horizontal integration . It offers separate marijuana licenses for cultivation, production, and retail sale, and market participants cannot hold all three licenses 14. In contrast, Colorado encourages vertical integration , issuing marijuana licenses for cultivation, ma nufacturing , testing, and retail sale . A single individual or organization can own more than one license . In California, MMRSA appear s to favor horizontal integration. 15 As a starting point, this model may make sense for recreational marijuana too. As the market evolves, the state could reconsider how the market is integrated. California must also consider the US De partment of Justice desire to limit the number of participants in the legal marijuana industry. A strong licensing system that restricts participation would be easier to oversee than a more competitive market with numerous participants. 16 Unlimited licensing c ould strain regulatory enforcement. However, limiting the number of licenses might jeopardize efforts to bring participants in the illegal industry into the legal fold. Colorado has not limit ed the number of licenses, but the application process is demanding. Washington initially limited recreational marijuana sales licenses to 334 based on estimated consumption levels. It later increased the limit to 556, citing a need to provide marijuana to medical patients. 17 California also must set limits on the scale and location of production operations. These include canopy limits— l imits on the area under cultivation and/or the number of plants —as well as cultivation rules in densely populated areas, such as not allowing marijuana facilit ies within 1,000 feet of a property line or near schools, recreational facilities, and the like. One approach would be to target total production for the legal market, determine a canopy limit, and calculate the number of licensed grows needed to meet that level of production. Placing limits on the number of production licenses an individual or organization can own would make it easi er for s mall businesses to operate in the market. Production regulations might include residency requirements. Limiting out -of -state investment could reduce criminal involvement and strengthen the state’s economy by allowing California residents to benefit more from the marijuan a industry’s economic opportunities. However, short -term residency requirements might lead to an influx of new residents . Length -of -residency requirements affect who participates in the industry and when they do so. Colorado requires two -year residency to obtain a license. Washington has a six -month residency requirement for license applicants and financiers, that is, any entity giving money, gifts, or loans. 13 There is a perception that legalization carries a dividend in the form of reduced need for enforcement. This is an empirical question. It is conceivable that enforcement costs could increase because of the additional expense of regulating legal marijuana while suppressing the illega l industry. 14 Washington Initiative Me asure No. 502 (I-502) ; appeared on the November 2012 ballot. 15 MMRSA changed medical marijuana licensing to allow for -profit businesses. The number of licenses available to entrepreneurs are not restricted. 16 MMRSA does contain a clause that permits mariju ana businesses that have already integrated vertically to continue to operate in that manner until January 1, 2026. 17 From Washington State Liquor and Cannabis Board Press Release, December 2015 . PPIC.ORG Regulating Marijuana in California 12 California is unique in the extent of environmental protection required to grow marijuana . Neither Colorado nor Washington included specific environmental protections in their legalization laws. By contrast, California’s medical marijuana regulations require mitigation of the “individual and cumulative effects of water diversion and discharge…[with rega rd to] instream flows needed for fish spawning, migration, and rearing.” 18 In crafting future regulations, protections can require that marijuana waste be ma de unusable without harming the environment. The discussion thus far assumes the market structure that is most commonly expected to prevail in the marijuana industry: a commercial style, competitive market that allows cultivation, production, and final sale to the private for -profit sector. This market would be regulated in accordance with an alcohol -s tyle regime that has age restrictions regarding use, restriction on how and where use occurs, and other things such as product labeling. There are alternative market structures that might be considered, such as government monopolies, nonprofit corporations , and for-benefit organizations. The benefits and costs of these alternative structures would have to be carefully delineated (Caulkins et al. 2015). 19 States that have legalized thus far use a commercial, competitive, but regulated market structure modeled after the alcohol industry; California’s medical marijuana industry is also structured this way. If policymakers seek to move quickly to allow recreational marijuana, they might choose to maintain this market structure. One critical re gulatory question c oncerns product testing. This requires labs qualified to test for mold, pesticides, tetrahydrocannabinol ( THC ) potency, and other variables . 20 THC potency data inform s consumers about dosage and may be used to set taxes . In addition, regulations might place restriction s on potency itself. Increased demand for marijuana for legal recreational use may require more labs to ensure that testing delays don’t choke off supply. If legal supply falls too low because of testing bottlenecks , the illegal market might fill the gap with untested product s. Increasing testing capacity sooner rather than later is the logical course for protecting product quality and consumer safety while s uppressin g the illegal market. M arijuana -infused products —marijuana edibles —pre sent additional challenges. E dibles can pose health risks to consumers unfamiliar with the ir delayed effects. After high -profile media stories raised concerns about marijuana edibles , Colorado created a task force to write regulations covering amounts that can be purchased, plus labeling and lab testing for potency. Meanwhile, Washington issu ed emergency regulations requiring that the Washington State Liquor and Cannabis Board approve product packages and labels. Washington also requires that labels promine ntly display serving-size information. The state also requires edible processors to follow available-for -inspection recipes ensur ing serving -size consistency. Such standards reduce overdose risk s and protect public health. 21 R egulation of the production chain involves a range of related, but distinct issues designed to achieve differen t objectives . In order to protect the environment , structure the market, and prevent diversion to other states and minors, we recommend a regulatory structure that tightly d ocuments and control s cultivation, production, processing, and sale of legal marijuana. A tight approach would limit the number of licenses and the scale of production , and impose strict testing requirements. Such a regime w ould help satisf y U S Department of Justice guidelines now , but can be modified in the future . To be sure, a tightly regulated market has problems. It could create incentives to oper ate illegally , which would present risks to 18 California AB 266. 19 See table 4.1 of the RAND report for a review of the strengths and weaknesses of each alternative market structure. 20 MMRSA task its Departments of Pesticide Regulation and Food and Agriculture with determine standards for pesticide usage in c ultivating marijuana. 21 In Colorado and Washington, an individual serving cannot have more than 10 milligrams of THC and when sold as part of a group or bundle, that bundle cannot exceed 100 milligrams of THC. Washington further restricts the production processes of edibles to ensure consistency. PPIC.ORG Regulating Marijuana in California 13 the environment and encourage diversion to minors and other states. Still, in our view, the advantages outweigh the disadvantages. Sales, Use, and Consumption Since recreational marijuana is currently against the law in California, legalizing it requires reforming the criminal code. R egulating legal access has two goals: revising the definition of criminal behavior while minimizing use by young people. Indeed, advocates say that decriminalizing use and distribution of marijuana is one of the greatest benefits of reform, both for the state and drug policy nationwide ( Clockb urn et al . 2013) . Enforcement of those laws has disproportionately fallen on poor people and minorities. In theory, legal recreational use will reduce the burden on the state’s police, courts, prisons , and jails, saving money. As noted though, enforc ing a new regulatory structure and suppressing the illegal market might ultimately cost the state more money. 22 Regulating recreational marijuana raises multiple questions. Table 2 shows some of the most important provisions adopted by Alaska, Colora do, Oregon, Washington, and the Dist rict of Columbia , where use is now legal . To greater or lesser degree s, the four states place restrictions on retail sales of recreational marijuana, and s ale remains il legal in the District of Columbia. 23 Existing laws a lso limit when, where, and how marijuana may be consumed, packaged, and labeled. TABLE 2 Regulating the sale, use, and consumption of marijuana Alaska Colorado Oregon Washington District of Columbia Ag e restrictions 21 and older 21 and older 21 and older 21 and older 21 and older Resident sales limits Up to 1 ounce Up to 1 ounce Up to 1 ounce Up to 1 ounce Sales illegal Fines, suspensions for sale to minors Determined by Marijuana Control Board License revocation or up to $100,000 in fines License cancellation and $4,950 fine License cancellation and $2,500 fine N/A Public consumption Unlawful Unlawful Unlawful Unlawful Unlawful Drug “tourist” distinction No distinction Sales limited to 0.25 ounces to non-residents No distinction No distinction N/A Home grows for personal use Permitted Permitted Permitted Not permitted Permitted Local ordinances restricting s ale/ use Permitted Permitted Local governments may not prohibit sales or use, except by general election referendum Permitted Congress can intervene SOURCES: Alaska Ballot Measure 2, Colorado Amendment 64, Oregon Measure 91, Washington Initiative 502, and District of Columbia Initiative 71. NOTES: See Technical Appendix B for complete description of the provisions . 22 As noted in Figure 1, the number of adult arrests associated with marijuana dropped d ramatically beginning in 2011. Criminal justice savings could be quite modest since it require a further drop in the number of adults arrested. Use and possession will remain illegal for those under 21. 23 Congress prohibits the District from making expenditures to regulate recreational marijuana . PPIC.ORG Regulating Marijuana in California 14 Alaska, Colorado, Oregon, and Washington limit recreational sales to people 21 or older. California is als o likely to impose a 21- year age requirement. The concern about marijuana use by minors is supported by research showing that marijuana can affect brain development —particularly thinking and memory —and learning. 24 The decision to set an age requirement is a case of regulatory trade-off . Though many people favor legal recreational marijuana, understanding that such a reform would increase overall marijuana use, even the most ardent advocates hold that young people’s access to marijuana should be restricted in the same way their access to alcohol is restricted. By setting an age requirement, po licymakers seek to limit youth exposure. However, keeping marijuana illegal for those under 21 means marijuana will remain a criminal justice matter. Providing marijuana to minor s will still be a crime. Despite legal recreational use, enforcement of mariju ana laws will remain a responsibility of the police and court systems. The four states that have legalized recreational sales confine them to marijuana -only stores, a distinction from alcohol , which in many states is sold in grocer ies and other retail establishments. Neither Colorado nor Washington allow marijuana to be consumed on store premises, and public use is prohibited. The two states also give local authorities some control over whether marijuana stores can locate in their jurisdictions and what re strictions govern their operations. Laws limit ing access to marijuana will only be effective if they are enforced. California should implement stiff penalties on underage marijuana sales and apply the law similarly to the way rules prohibiting underage alcohol sales are enforced . To test retailer compliance, l aw enforcement agencies can implement youth purchase programs in which minors attempt to buy marijuana (National Institute on Alcohol Abuse and Alcoholism 2014). California can also mandat e use of ID scanners for age verification or installation of closed-circuit televisions. In Colorado, the Marijuana Enforcement Division conducted 172 compliance checks between January 1, 2014, and September 30, 2015, according to the Department of Revenue. The agency found 16 violations , a 91percent compliance rate. 25 Washington completed its first round of compliance investigations in July 2015. It found 18 of 157 recreational marijuana stores sold to minors, an 88% compliance rate. T he noncompliant business faced a 10-day suspension or $2,500 fine. 26 Finally, California should consider exte nding the state’s social host law to marijuana. Currently , it makes adults and minors liable if they provide alcohol to those under 21 or allow them to consume alcohol on their property . 27 One wild card is home grows —marijuana cultivation for personal use. The states that allow personal cultivation limit the number of plants an individual may grow . Nonetheless, a llowing home grows creates a loophole in cultivation and consumption regulation. Individuals found with marijuana that cannot be traced in the production tracking system, is unlabeled, or exceeds quantity limits can claim to have grown it at home. In order to maintain tight control over cultivation and consumption, W ashington prohibits home grows. California sh ould consider doing the same . By removing the home -grow loophole, such a step would simplify the question of possession. However, banning home grows would be unpopular with recreational marijuana supporters . Consistent with creation of a tight market, we recommend restricting use to those 21 and over . Quantity limits should be imposed and marijuana should only be available in stores established specifically to sell it. To discourage underage sales, penalties f or selling to minors should be significant , includ ing possible license forfeiture . 24 See the National Institute on Drug Abuse . 25 Reported in The Denver Post on September 30, 2015. Colorado Marijauna and Enforcement Division (MED), 2015. 26 From Washington State Liquor and Cannabis Board, July 2015 Press Release . 27 Under the law, recently upheld by the State Supreme Court (Ennabe v Manosa, 2014), victims of crimes committed by minors may seek damages from the person who gave them alcohol or allowed them to consume it. PPIC.ORG Regulating Marijuana in California 15 Taxes and F inance Tax es are usually seen as m easures to raise revenue for government. But, for certain products perceived as having harmful social or health effects , taxation provides a way to influence consumer choice and reduce negative consequences. Depending on how taxes a re levied, they affect a product’s price . Higher prices tend to lower consumption, thereby reducing the harm a product causes. 28 Policymakers must determine the goals of marijuana taxation and strike the right balance between reducing consumption and raising revenue. I f the goal is to limit consumption, high tax rates that raise retail prices should deter recreational use and reduce negative consequ ences , such as abuse. However, th is benefit may be lost if prices are set to o high. Steep marijuana prices c ould fuel the illicit market, the opposite of what legalization is intended to achieve. 29 Cigarette taxes are t he obvious analogy. R esearch shows that higher cigarette costs reduce consumption, particularly among young people. 30 Th us, reduc ed consumption and increased revenue are both benefits of cigarette taxes . But finding the best cigarette tax rate involves difficult trade -offs . A h igher tax would deter consumption, but might diminish revenue . The four states with legal sale of recreational marijuana impose taxes both to raise revenue and deter use. Those taxes keep marijuana prices artificially high, but not so lofty as to fuel the illicit market. State experience with taxing marijuana is too brief to identify the price inflection points. However, both Washington and Colorado have generated millions of dollars in marijuana tax revenue. In taxing marijuana, s tates must d ecide the tax base , that is, what to tax . They must also decide where to apply tax es: at final sale or at various points along the production cycle . For the tax base, three areas are usually considered : weight, price, and potency , each with advantages and disadvantages. A weight -based tax is fixed by quantity, for example , $50 dollars an ounce. Such a tax is easy to administer, simple to understand, and can be implemented quickly. However, it creates an incentive for sellers to differentiate products by potency, which co uld harm consumers ( Caulkins et al. 2015). A price -based tax —also known as an excise tax—is set as a percentage (ad valorem) of value. Such a tax is levied on the seller and treated as a business cost . Typically, it is passed along to consumers in the final retail price. 31 Ho wever, states should consider that higher retail price s spurred by this tax could run counter to the goal of reduc ing the size of the illegal market. 32 A price-based tax is simple and easy to implement and administer.33 But, if imposed on cultivators, producers, and processors, it creates incentives for tax evasion from “phony prices” along the supply chain ( Oglesby 2015). A potency- based tax is assessed on a product’s THC content and could potentially control product quality . Unlike a weight -based tax , which enables sellers to differentiate their products according to THC content, a potency - based tax addresses product strength directly. 34 However, a potency-based tax has many disadvantages, especially t he challenge of ensuring that product testing is reliable (Gravelle and Lowry 2014). Determining when and at 28 The extent of the change in consumption depends on what economists refer to as the price elasticity of demand. 29 Product quality control can also check the illicit market. Consumers may favor legal marijuana because they have greater assu rance that the product doesn’t contain toxic adulterants or pesticides 30 For a synthesis of 108 studies on the impact of taxes and prices on cigarette consumption, Bader, Boisclair , and Ferrence , 2011. Of the 31 published studies that focused specifically on youth, 23 found a reduction in prevalence and four found reduced prevalence under particularly circum stances. 31 A subst antial body of literature notes that the excise tax burden is not borne solely by the consumer. How the burden is distributed depends on the relative elasticities of supply and demand. 32 A price- based tax can also be assessed on consumers of the final prod uct through a sales tax. A sales tax is calculated as a percentage of the retail value (percentage of the final sale price) and is much simpler to manage. Unlike the excise tax on sellers, its cost is directly apparent to consumers who see it added to the retail price at the final point of sale. However, a sales tax might enable tax evasion, “because it allows untaxed marijuana to linger in the supply chain be fore a retail sale takes place” (Oglesby 2015). 33 However, because it is calculated as a percentage, a price -based tax is regressive, taking a larger share of the disposable income of poor people. 34 A potency -based excise tax could help control potency levels and ensure that consumers know a product’s strength (McCoun 2010). PPIC.ORG Regulating Marijuana in California 16 what stage to test products would be a regulatory nightmare. And a potency tax could encourage “lab shopping” in which marijuana producers and sellers look for testers who offer the most favorable results. Another question is whether product transfer s along the supply chain should be taxed. Such a levy could be structured as an excise tax at a fixed price per unit of volume when a product is moved between locations. Alternatively, it could be assessed as a percentage of product value at various transfer points before reaching consumers. Such a tax would also affect retail price s. 35, 36 Colorado impose s a 15 percent excise tax , a special 10 percent sales tax , and the standard 2.9 percent state sales tax , plus applicable local taxes, on recreational marijuana . Medical consumers pay only the 2.9 percent state sales tax and other local taxes (Colorado Department of Revenue 2015). Washington initially levied a 25 percent tax at three stages along the supply chain. In July 2015, the state legislature change d the tax model , impos ing a 37 percent retail tax on top of the standard 6.5 percent state sales tax . Business taxes, occupation tax es, and other local taxes also apply . 37 I n the end, simplicity and convenience may determine how and at what point in the supply chain California sets marijuana tax es. A complex tax system designed to achieve multi ple social objectives has some advantages. But Washington offers a cautionary tale. It found that complexity created undue administrative and regulatory burdens. Simplicity won the day. Table 3 shows that revenue generated from marijuana taxes can be substantial . How much revenue California collects will depend on the scale of the legal market, the tax rate structure, tax avoidance, and individual behavior. 38 In 2010, wh en California looked at taxing recreational marijuana use, revenue estimates ranged from $674 to $1.4 billion. 39 The California Legisla tive Analyst’s Office (LAO) estimates that legalizing recreational marijuana could save the state more than $100 million in criminal justice expenditures and generate “from the high hundreds to over $1 billion ” in additional revenue (2015). By comparison, in 2014, the state collected $49.5 million in sales tax from medical marijuana dispensaries that reported sales , according to the state Board of Equalization. 40 California received $782 million in revenue from tobacco taxes in 2013 (California State Board of Equalization 2015). 35 Discussion with Colorado officials suggests that the state’s tax or fee on product transfers has a problem because returned products are subject to the fee. 36 U nder federal tax law, businesses in states that permit medical and/or recreational use are prohibited from deducting sta ndard business expenses such as payroll and rent against gross sales receipts (26 US Code, 280E). Marijuana businesses also may not deduct the state excise taxes assessed on retail marijuana sales. Thus, f ederal taxes are assessed largely on gross rather than net income, substantially increasing tax burdens of marijuana businesses. Those businesses may still deduct expenses unrelated to marijuana (Internal Revenue Service, 2015). This high federal tax burden, combined with the need to keep retail prices in line with demand, may make recreational marijuana less profitable than some entrepreneurs anticipated and hold back the legal recreational market ’s growth. 37 Washington originally charged producers, processors, and retailers a 25 percent value -added tax, b ut administering it proved complicated. The 37 percent tax took effect July 1, 2015. See Second Engrossed Second Substitute House Bill 2136, Washington state legislature, 2015. 38 The Washington and Colorado experiences suggest there will be a learning curve no matter how reasonable initial forecasts may appear. The challenge forecasting revenue is that little is known about consumer demand because recreational marijuana has been illegal. Colorado grossly overestimated tax revenue in the first year after legaliz ation. It projected $70 million , but only realiz ed $44 million ( Associated Press February 2015). Washington significantly underestimated first -year tax revenue . It project ed $36 million and realiz ed $70 million ( Associated Press July 2015). Since th en, tax revenue has grown tremendously in both states and has beg un to cover regulatory costs, plus earmarks for service such as substance abuse prevention. 39 The RAND Corporation estimated from $674 million to $883 million based on a $50 -per -ounce excise tax (Kilmer et al. 2010). Using the same tax rate, the California Board of Equalization estimated $1,382 million (2009). 40 Those taxes were based upon reported taxable income of $570 million from 1,623 dispensaries registered with the Board of Equa lization. It is not clear what share of California dispensaries that represents. Passage of MMRSA is expected to routinize tax reporting. See https://www.boe.ca.gov/news/marijuana.htm . PPIC.ORG Regulating Marijuana in California 17 TABLE 3 Colorado and Washington m arijuana taxes generate substantial revenue (dollars in millions) Colorado Washington Tax rates 15% excise 10% special sales 37% retail sales State sales tax 2.9% 6.5% Taxes on medical marijuana Only sales tax Same Projected FY2016 recreational marijuana tax revenue1 $125.0 $115.1 Actual receipts, first quarter fiscal year 20162 $34.0 $38.6 NOTES: 1 The Colorado and Washington fiscal year s begin in July and end in June. The revenue forecast for Washington is for a July –June 2015 –2017 biennial budget. The Washington forecast for the cannabis excise tax as of September 2015 is $230.2 million . 2 Colorado t ax receipts are for the fi rst quarter of FY 2016 (July – September) as reported by the Colorado Department of Revenue. A nother question is how to use marijuana tax proceeds. It is politically advantageous to temper opposition to a marijuana tax by designat ing a popular cause or program to receive revenue. Earmarking revenue can be a way of financ ing regulatory oversight of the marijuana industry and support ing public health activities. 41 M aking regulatory enforcement dependent on tax revenue f rom the industry it oversees could create conflicts of interest. And it can be argued that earmarking is bad budgeting policy (Phillips 2015). On the other hand, designating marijuana revenue for regulatory operations makes regulatory costs transparent. Colorado earmarks marijuana funds for public schools , capital construction, and enforcement o f marijuana industry regulations (Colorado Proposition AA 2013). Washington earmarks funds for campaigns to discourage use by minors, public education and public health, and program impact evaluation . Marijuana revenue does not finance regulatory oversight 42 Finally, cash is the financial elephant in the room. Because marijuana remains illegal under federal law, businesses cannot obtain standard bank ing and financial services. In response, states accept license and tax payments in cash. Ev en the IRS now accepts cash . But the fact that cultivators, producers, processor, and retailers do so much of their business in cash makes it easier to avoid reporting income. Moreover, marijuana businesses pay for services such as construction and legal assistance in cash, multiplying the problem of unreported income. Lack of access to financial services means that, despite legalization, a large fraction of marijuana commerce will remain unreported , resulting in lost tax es for governments at all levels. 43 Public Safety and P ublic Health For any psychoactive substance, an important regulatory goal is protect ing the community and , in particular, the well -being of young people. Californians already use marijuana at a relatively high rate . As with other drugs, some of that use is abus ive and harm ful. If recreational marijuana becomes legal, th e amount of use will probably rise further. 44 The challenge is to mitigate the of impact of legal recreational marijuana on public health and safety. The issues of greatest concern include drugged driving, protecting young people, and preventing addiction and abuse. 41 Regulatory costs include licensing, product monitoring, and enforc ing product quality, lab certification, labeling, and other rules . In a public health context, marijuana -funded services could include programs discouraging minors from using marijuana and providing treatment if they abuse it. Mar ijuana education and health campaigns, and treatment and recovery services for adult abusers can also be earmarked. 42 Washington State Legislature, Uniform Control Substance Act 69.50.545. 43 Large quantities of cash also mean marijuana businesses must spend heavily on security to deter robberies and protect employees. 44 See Technical Appendix D for a discussion of current levels of marijuana use in California and the impact of legalization in other states. PPIC.ORG Regulating Marijuana in California 18 California can take specific steps that d raw on the experience of other states and on efforts to counter the dangers of alcohol . Driving and impairment Driving under the influence of marijuana can be dangerous, but little is known about how marijuana impairs driving. Marijuana affects reflexes and motor skills (Ramaekers et al . 2006) and its use has been linked to increased accidents (Asbridge et al. 2012). 45 Moreover, research shows that accident s are much more likely for those under the influence of both marijuana and alcohol (Smiley 1999). Many Californians who consume marijuana already get behind the wheel (Lacey et al . 2012). If the number of recreational user grows, it will increase the number of drugged drivers on the roads, even if the rate of people who engage in this risky behavior stays the same. The state should take whatever steps it can to minimize drugged driving. A n obvious starting point is a public service campaign to educate drivers about the danger of driving after using marijuana, similar to efforts aimed at combatting drunk driving. In addition, the state can increase enforcement and penalties to deter drugged driving. Harsh sanctions should offer a deterrent . But cannabis presents a unique enforcement challenge. B lood alcohol content (BAC) has long been used to measure driving impairment . All states now use a 0.08 BAC level as the legal limit for driving under the influence of alcohol. Technology allows accur ate roadside test ing. And the California D epartment of Motor Vehicles has issued guidelines that let drivers estimate their BAC based on body weight and quantity of alcohol consumed. No equivalent standard exists for marijuana. R esearchers disagree about a “safe” level of blood THC. One study suggests that impairment is correlat ed with a THC content between 7 and 10 nanograms per milliliter (Grotenhermen et al. 2007) . States with per se laws— including Washington and Colorado—h ave settled on 5 nanograms per milliliter to establish impairment. 46 Those opposed to setting an absolute level note that the causal link between THC blood levels and impairment has not been established as it has with blood alcohol (Armentano 2013). A recent US Department of Transportat ion study echoed the point, conclud ing that “specific drug concentration levels cannot be reliably equated with a specific degree of driver impairment" (Berning, Compton, and Wochinger 2015). T here is also a practical consideration regarding testing for d rugged driving. The alcohol breathalyzer is accurate and can be administered safely on the side of the road. Drawing blood to test for THC is far more complicated, requiring medical personnel and chain- of-custody procedures. 47 Data from Washington and Colorado show that increases in positive tests for marijuana are associated with higher rates of traffic accidents and driving infractions . However, it is difficult to determine whether the rise in drugged driving detection is the result of increased access to marijuana, more people using marijuana, or simply stepped - up law enforcement. Colorado l aw enforcement officials point to a recent increase in cannabis- related traffic fatalities as evidence of harm from legalization. The fede ral highway fatality reporting system found that the share of Colorado drivers involved in fatal accidents who tested positive for marijuana rose from less than 8 percent in 2008 to almost 11 45 Like alcohol and driving, the level of impairment and subsequent level of risk varies according to person’s size, the length of time between use and driving, and frequency of use. 46 For Washington, the DUI limit was part of the legalizing initiative I 502. The Colorado legislature passed their DUI limit (HB 1325) as part of a group of laws implementing Amendment 64. 47 Saliva testing— done in the United Kingdom —has been proposed as an alternative. However, the large number of motorists who tested positive in early use of the test suggests either an epidemic of drugged driving or an overly sensitive test (Massey and Payne, 2015). The cheek swab test was introduced in March 2015. In the first two months of implementation, police reported a positive testing rate for cannabis and cocaine ranging from 25 percent to 56 percent, with cannabis accounting for the vast majority of positives. This compares with a positive rate of about 5 percent in roadside alcohol tests. Researchers at Washington State University have said they hope to have a breathalyzer -like test available by 2016 (Santos 2015). PPIC.ORG Regulating Marijuana in California 19 percent in 2010 after medical marijuana was legalized and 19 per cent in 2014 after recreational use was legalized (Rocky Mountain H igh Intensity D rug Trafficking A rea 2015). Blood tests performed on Washington motorists also show an increase in drugged driving. Positive tests for THC rose from 18 percent in 2009 to 33 percent in the first four months of 2015 (Couper 2015). However, no THC blood level trend is evident. Of drivers who tested positive for THC in 2015, 44 percent were above the state’s 5 nanogram per milliliter impairment standard, with an average concentration of 4.2 ng/mL. That compar es with 49 percent above 5 nanograms and average concentration 4.6 ng/ mL in 2009 (Couper 2015). If California legalizes recreational use, it should act decisively to reinforce drugged driving prevention and deterrence. The state must take steps to ensure that enforcement of drugged driving laws is consistent and effective. Th at will require training and development of an accurate, practical test for marijuana that can withstand court scrutiny. FIGURE 3 Positive driver tests increased in Colorado and Washington. SOURCE S: Rocky Mountain High Intensity Drug Trafficking Area . Washington State Toxicologist. NOTE: Washington data for 2015 is projected from the first four months of the year. Washington impairment standard was THC levels 5 ng/mL and above. The Colorado lab used THC levels of 2 ng/mL to confirm a positive test . 0 1000 2000 3000 4000 5000 6000 7000 8000 2009 20102011201220132014 Drivers Colorado Tests conducted Marijuana detected Above confirmation level* 0 1000 2000 3000 4000 5000 6000 7000 8000 2011 2012201320142015* Drivers Washington Tests conducted Marijuana detected Above impairment standard* PPIC.ORG Regulating Marijuana in California 20 A prime source of information about marijuana and driving is the Fatality Analysis Reporting System (FARS), a nationwide National Highway Traffic Safety Admin istration database on fatal motor vehicle accidents . The FARS data provide information on the number of drivers involved in fatal car accidents who tested positive for cannabinoids. However, t his data has limitations. Reporting in California is in consistent because there is no statewide standard for lab testing of drugs , and measurement has changed over time. And, i mportantly, positive results don’t necessarily demonstrate impairment, especially because cannabinoids stay in the system much longer than other drugs. With those caveats, t he data indicate that fatalities in California involv ing drivers testing positive for cannabinoids r ose from 62 in 1994 to 292 in 2014. 48 Of fatal crashes with positive marijuana results, 37 percent also involved blood- alcohol concentration s above the legal limit. By comparison, fatalities that involved BAC concentrations above the legal limit dropped from 1,468 to 882 over the same period. 49 FIGURE 4 Testing for marijuana an d alcohol in California traffic fatalities Source: Fatality Analysis Reporting System , National Highway Traffic Safety Administration . Minimizing underage use Many young Californians use marijuana. That will continue if recreational use for adults is legalized despite prohibiti on of sale to minors . Moreover, permitting a recreational market sends a message to youth and could make marijuana more appealing. California should help young people mak e good choices about psychoactive substances such as marijuana and act to prevent its promotion to minors . To keep you ng people from using marijuana , California should implement prevention strategies similar to those involving prescription drug misuse and underage alcohol and tobacco use. Although underage alcohol and tobacco consumption are illegal—as is use of prescription drugs without medical authorization— adults are free to 48 In 1994, 4,227 traffic fatalities occurred in California. A driver tested positive for marijuana in just over 1 .5%. In 2014, of 3,074 fatalities, 9.5% reported a driver with positive marijuana tests. 49 Some research suggests that increased marijuana use could reduce traffic fatalities if marijuana were to become a substitute for alcohol (Anderson, Hansen, and Rees 2012). This does not suggest that driving under the influence of marijuana is safe, but that patterns of use may affect driving differently from alcohol. 0 50 100 150 200 250 300 350 400 Fatalities Marijuana (or cannabinoid substance) positive results Marijuana with alcohol levels above legal limits (>=0.08 BAC) Marijuana with alcohol within legal limits (0.01- <0.08 BAC) PPIC.ORG Regulating Marijuana in California 21 use these products. The social acceptance and legal status of these products for adults may cause you ng people to assume they are safe (National Research Council 2004). Strategies to prevent minors from using marijuana should first disseminate accurate information to correct this normative belief and then address other factors. In a ddition, California c an implement parental education programs to encourage adults to keep recreational marijuana secure and monitor supply. These could be modeled after similar parental education programs for prescription drugs (Johnson et al . 2007). By encouraging parents to lock up marijuana, such programs could reduce both intentional and accidental use by children and youth. Deterrence and education are the best strategies to minimize underage marijuana use, but regulation of marketing also plays a part. Both Washington and Colorado adopted provisions to limit marijuana’s appeal including restrictions on marketing through traditional media such as billboards, television, radio, newspapers . They also regulate outlets and signage. Washington’s law is specific, even dictating square inches allowed for signs. However, Washington’s marijuana agency f inds enforcement of signage provisions cumbersome and believes some retailers have developed ways to circumvent the law’s sp irit. California currently prohibits advertisements promoting physician recommendations of medical marijuana unless such ads not e that cannabis is a S chedule I drug (Section 2525.5 of Article 25, U.S. Senate Bill 643, 2015). If recreational use is approved, regulation of marijuana marketing must be strengthened to protect minors. California should adopt a realistic strategy that acknowledges the difficulty of controlling messages that reach young people. The rise of digital media makes regulation much harder and social media have boosted the impact of word -of - mouth marketing . A new law should restrict itself to establishing basic principles and leave details to a regulatory agency. Such an approach enable s restrictions to react more easily to unforeseen marketing practices. California can look to Colorado and Washington and its own medical marijuana rules for strategies to prevent accidental recreational marijuana use by young people. Colorado and Washington have packaging requirements similar to a rece ntly passed California law covering medical marijuana (SB 266 ). This law does not require childproof containers like those for prescription medicine and dangerous household products . But it sets packaging standards arguably more stringent than those for tobacco and alcohol , requir ing that marijuana and cannabis products use tamper -evident packaging that cannot be “attractive to children .” Packages also must include specific caution labels (section 19347). California can apply these and other rules to recreational use as well. Abuse, dependence, and t reatment The extent of marijuana abuse and dependence will depend directly on how prevalent marijuana becomes if recreational use is legalized . Research suggests that a rise in users and easier access to marijuana will increase the incidence of addiction and abuse (Hasin et al . 2015). For example, studies in Los Angeles showed a relationship between medical marijuana dispensaries and rising marijuana- related hospitalizations (Mair et al. 2015). If marijuana use rises, abuse and dependence will also increase. California’s public health and substance abuse treatment system s would feel the impact . Emergency department data show that from 2008 to 2014, visits with drugs as the primary diagnosis increased 40,942. Of these, t he share of marijuana-related primary diagnoses increased a few percentage points. PPIC.ORG Regulating Marijuana in California 22 FIGURE 5 Emergency department visits in California: Marijuana -related prima ry diagnoses increased as a share of all drug -related primary diagnoses SOURCE: Emergency Department ICD- 9-CM Code Frequencies , California Office of Statewide Health Planning and Development (OSHPD) . US Substance Abuse and Mental Health Services Administration data show treatment facility admissions in which marijuana was the primary substance of abuse fell from 33,691 in 2012, equal to 20.5 percent of all admissions, to 24,022 in 2014, or 15.3 percent of all admissions. Although marijuana treatment admissions decreased, the under -21 share rose to 53.9 percent in 2014 from 10.4 percent in 2012 (Substance Abuse and Mental Health Services Administration 2012, 2015). This suggests that marijuana legalization may not have a large overall impact on California’s drug treatment system , but that client age distribution could change. 50 T hese statistics only indicate the primary substance o f abuse. Many heroin and amphetamine users also use marijuana. Such secondary marijuana use may increase with legalization. RAND ha s estimated that legalization would increase state treatment costs by $2 million to $5.6 million (Kilmer et al. 2010; Pacula 2010). H istorically, about half of all treatment referrals in which marijuana was the primary substance of abuse have come from the criminal justice system (Pacula 2010). In the wake of Proposition 47, these referrals have already begun to fall in Califor nia. If recreational marijuana use becomes legal, California must develop strategies to minimize patterns of use that could lead to abuse and dependence. California’s embrace of the Affordable Care Act , including Medicaid expansion and a state wide health insurance m arketplace, e nsures wide coverage of substance abuse treatment ( US Department of Health and Human Services 2013). To build on this, California should enforce coverage mandates, address adequacy of insurer network s, and implement Medicaid reimbur sement rates acceptable to providers. California also must continue to finance treatment programs for uninsured individuals. Under legalization, young people who abuse marijuana will still be committing a crime . The state should direct them to treatment and diversion programs r ather than prosecuting them. Because adult referrals for marijuana treatment from the criminal justice system have fallen, mechanisms to identify those who need treatment should be expanded. One such avenue could be the Screening, Br ief Intervention, and Referral to Treatment (SBIRT) 50 Interestingly, the number and proportion of drug treatment admissions with heroin or methamphetamine the primary substances of abuse increased during this period . T hese two drugs now represent 55% of all drug treatment admissions in California . 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 2008 200920102011201220132014 Primary diagnoses Drug-related primary diagnoses Marijuana-related primary diagnoses PPIC.ORG Regulating Marijuana in California 23 approach in primary health care facilities, hospital emergency rooms, and other settings. SBIRT is a comprehensive, integrated public health practice that provides early intervention and treatment in case s of substance ab use and for those at risk . Governance and Accountability Legalizing recreational marijuana would be a far -reaching policy change. L ittle research is available on its potential effects on usage rates , public health, and safety (Caulkins et al. 2012) . Studies have examined the social cost of illicit drug abuse, focusing on health, crime, and lost productivity (National Drug Intelligence Center 2011) , but it isn’t clear how those findings would translate to a legal market . Legalization would bring California into a brave new world filled with uncertainties. California’s marijuana regulatory structure should incorporate a feedback mechanism to determine what is work ing and what is not. Such a mechanism would track key metrics, conduct analyses, and perform sophisticated research to show both the intended and uni ntended results of policy . Good governance will require effective monitoring of outcomes so that adjustments can be made as needed. The new status of recreational and medical mar ijuana is not just a legal change. It is a system ic change with an impact extending well beyond the criminal justice system . Collection and analysis of data on p rocesses and outcome s will help regulators and policymakers adapt and bet ter serve the public i nterest. A good feedback mechanism is transparent . It should show clearly how a program or policy is perform ing by comparing results with expectations (Simeone et al. 2005). 51 Outcome evaluation, that is, evaluation of performance , should be quantitative, scientific, and based o n data, preferably from publicly available sources. The feedback mechanism should also include qualitative, descriptive, and detailed process evaluations—that is, evaluations of a dministrative systems , whether newly created or modifi cations of existing systems. To date, l ittle information is available to support recreational marijuana process evaluations. In Washington and Colorado, formal documentation is scant on how regulatory change was determined and implemented. Colorado organi zed a task force to implement recreational marijuana, but no process evaluation has been produced on how task force recommendations were carried out. Washington ’s legalization i nitiative included a provision requiring process and outcome evaluations, the only state with such a requirement written into its marijuana law . 52 Washington recently released a preliminary implementation report that spells out plans for outcome evaluations (Darnell 2015). Washington ’s evaluation efforts represent good governance . They help ensure t hat the state’s marijuana experiment meets public expectations and generates information useful to policymakers inside and outside the Washington (Wallach 2015). California should act sooner rather than later to set up a data collection system to track processes and outcomes. It should also plan regular performance evaluations , which will help guide policy refinements. 53 The state took a step forward when it established a governance framework as part of MMRSA . That legislation is a start, but high - 51 Evaluation is best structured using logic models that start with inputs and work their way through outputs and outcomes to determine whether progress matches objectives (Millar et al. 2001). The Washington State Institute for Public Policy released a logic model explaining how it will conduct a benefit -cost study that identifies the data and their sources that Initiative 502 requires in 2017. It also released a logic model that describes the interrelationships among inputs from seed -to - sale, prevention and education, consumption, and consequences that will support the benefit- cost study and other economic impact studies. 52 Part IV of Initiative 502, Washington’s legalization law, includes a provision for a dedicated marijuana fund that, among other things, earmarks all marijuana excise taxes, license fees, penalties, forfeitures, and other income from marijuana- related activities for biennial youth drug use surveys, a benefit -cost evaluation and outcome studies by the Washington State Institute for Public Policy , an Internet public education site with information about the health and safety risks posed by marijuana use , prevention programs, a hotline providing referrals to trea tment, and other public education activities. 53 Researchers on all sides of the issue should have access to reliable data. The objective is not to keep researchers happy, but instead to give researchers means to keep policymakers and the public happy. PPIC.ORG Regulating Marijuana in California 24 quality information requires that data be collected and made available for analysis. T he kinds of information that should be collected are generally straightforward . 54 Table 4 presents examples. TABLE 4 Examples of data collection to monitor imple mentation Regulatory area Data elements Cultivation and production Number of business licenses; business characteristics such as location, size, number of employees; major business cost categories ; production tracking by product and potency ; environmental violation citations. Sales, consumption, and possession Population-based drug incidence and prevalence estimates; measures of attitudes and perceived risk from drug use; drug product prices along the supply chain; drug purities at point of sale for marijuana and marijuana-infused products. Taxes and finance Revenues projected and realized by revenue source, such as tax types, license fees, fines, penalties; total sales . Public health and safety Drugged driving arrests and accidents; treatment admissions; emergency department admissions; calls to poison control; school dropout rates, expulsions, and absenteeism; marijuana arrests; public use citations. Governance Number of regulatory inspections; regulatory workforce size; number and types of violations; budget earmarked for data collection and research; process and outcome studies on benefit s and cost s, social cost s, diversion, demand , and other topics. The table does not present an exhaustive list, but it represents the minimum that should be in a public data set. It took 20 years following passage of Ca lifornia’s medical marijuana initiative before comprehensive market regulat ion was put in place. As a result, we lack basic information about the state’s medical marijuana market. How much is sold? At what price and in what form? Expanding the market without building in reporting requirements would severely hamper the state’s ability to monitor legal marijuana’s impact. Effective data collection instill s a capacity for change in th e marijuana governance structure. Both Washington and Colorado significantly modified marijuana regulation during the first year of implementation. Delegating the specifics of regulations to an oversight body and ensuring that resources are available to su pport it are ways to build in this capacity. Most important ly, high -quality data and analysis help ensure that polic ies are based on clearly defined goals. California must also decide whether to set up a unitary system in which the same rules govern medical and recreational marijuana licensure and taxation. S eparate structures could make the medical market more attractive than the recreational market , encouraging “cheaters” who use medical marijuana for recreation. Colorado separates medical and recre ational sales, though regulations are similar for both. The key difference is a lower effective tax on medical marijuana. Colorado sales figures indicate that the medical market accounts for more than 40 percent of marijuana sales. 55 This suggest s some recr eational consumers are buy ing medical marijuana because it costs less. L ike California, Washington had a robust, relatively unregulated medical marijuana market for a number of years. Washington’s recreational law did not originally take into account medical retailers. As a result, two markets with different regulations exist side-by- side. In 2015, Washington began reconciling the two regulatory systems. 54 H opefully, data gathering and analysis will be financed with dedicated funds collected from the marijuana industry, although a case can be made that state general funds should be used to avoid conflicts of interest. 55 This figure is based on reported state retail sales tax receipts from medical and recreational stores. In the law’s first months, medical sales accounted for a majority of total sales. Once recreational retailers were more fully operational, the medical share dropped. PPIC.ORG Regulating Marijuana in California 25 Eventually it will create one market with a single tax schedule. Medical users will be able to apply for exempt ion from the marijuana sales tax. For transparency and simplicity, California should establish recreational marijuana market regulations that adopt most features of the medical market. MMRSA represents a constructive step in developing a plan for regulating recreational marijuana. It requires licensing of all commercial cannabis activity, establishes a Bureau of Medical Marijuana Regulation , sets environmental protections , promulgates standards for producing and labeling marijuana -infused produ cts, and imposes o ther requirements. Still, the simpl est approach would be to create a single system for producing and selling marijuana in California. I f necessary, exceptions can be made for medical consumers. A single system would be easier to understand and enforce. California regulates f ew, if any, other products under two different sets of laws based on product use. 56 We recommend a unified system, in keeping with the idea that a restrictive and transparent approach is best and can be modified as needed. 56 We could not think of an y. Alcohol, tobacco, and gasoline are subject to oversight by different government agencies. But the product itself is treate d the same. Gambling provides the closest parallel. Lotteries, casino gaming, and horse racing are treated separately. In the case of gambling though, the products are different, although the purpose is the same. PPIC.ORG Regulating Marijuana in California 26 Conclusion Californians will shortly consider whether to permit recreational use of marijuana. Such a decision touches many policy sectors. This report g roups those sectors into five regulatory areas, e ach with distinct objectives. T he Washington and Colorado experiences offer recreational marijuana regulatory models. If California heads down the same path, we can learn from them . We offer recommendations for California based on the Washington and Colorado examples. The most importan t lesson learned is that recreational marijuana legalization should start with a relatively tight regulatory strategy —one that limits access at the outset. California can build in the capacity to ease regulations in the futur e as we learn from experience. Table 5 shows what this strategy might look like in practice in the five regulatory areas . TABLE 5 Elements of a tightly regulated marijuana market. Regulatory area Recommendations Future Flexibility Cultivation and production Limited number of licenses and size of cultivations, seed- to-sale tracking , strict environmental and water use requirements Expandable license availability, technology used to improve tracking systems Sales, use, and consumption Sales limited to individuals 21 and older, retail outlets restricted to marijuana- only stores, home grows prohibited Expansion of the number of outlets, legalization of home growing Taxes and finance A sales and/or excise tax as a percentage of selling price Tax rates raised or lowered as market performance and social impact indicate Public health and safety Aggressive prevention/education campaign aimed at youth, funded research to develop an impairment standard, substance abuse treatment for the uninsured New research-based impairment standards and prevention efforts Governance A single regulatory system that requires reporting and data collection across many indicators , buil t in reporting and impact assessment Adjustable data and reporting systems, determination of whether exceptions needed for medical consumers If California legalizes recreational marijuana, the state should develop a single regulated market, combining both medical and recreational marijuana. Such a market is most consistent with the approach we recommend, and would be simpler , more transparent , and easier to supervise . Building in strong oversight and data collection will help ensure that future changes are based on research and analysis. Very little is known about California’s illegal marijuana market and surprisingly little information is available on the medical market —even though medical marijuana has been legal for nearly 20 years. The lack of information makes it impossible to perform a rigorous analysis of proposed regulation s. T he state would be well served to err on the side of more-restrictive regulat ion. A tighter, smaller market would make California’s marijuana law easier to enforce and reduce the likelihood that legal marijuana would be diverted to other states or end up in the hands of you ng people. Of course, a highly regulated legal market would be accompanied by a robust illegal market. 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PPIC.ORG Regulating Marijuana in California 30 ABOUT THE AUTHOR S Patrick Murphy is director of research and a senior fellow at the Public Policy Institute of California, where he holds the Thomas C. Sutton Chair in Policy Research. His research focuses on education financing and manage ment in both K–12 and higher education. He is a professor of politics at the University of San Francisco, where he served as the director of the McCarthy Center for Public S ervice. His work has been published by PPIC, the Center for American Progress, the Thomas B. Fordham Institute, the Center on Reinventing Public Education, the Berkeley Center for Studies in Higher Education, and RAND. Previously, he worked for RAND and at the Office of Management and Budget in Washington, DC. He holds a PhD from the Uni versity of Wisconsin–Madison and a master’s of public affairs from the University of Texas –Austin. John Carnevale is p resident of Carnevale Associates, LLC, a public policy firm that offers guidance to governments, organizations, and communities as they co nfront the public policy and program challenges of the 21st century. He has consulted at the local, state, national, and international level on drug policy and criminal justice issues. Dr. Carnevale has served three administrations and four "Drug Czars" wi thin the Executive Branch of the US Government. At the White House Office of National Drug Control Policy (ONDCP), he directed the formulation of the President's National Drug Control Strategy as well as the federal drug control budget. Dr. Carnevale is re cognized as playing a key role in directing policy research that shifted the primary focus of the Nation's Drug Control Strategy from supply to demand reduction. Dr. Carnevale has also worked as a researcher at the Office of Management and Budget and in th e U.S. Department of the Treasury. Dr. Carnevale received his PhD in Economics from the Maxwell School of Syracuse University. ACKNOWLEDGEMENTS The authors would like to thank the reviewers of an earlier version of this report, including Rosalie Pacula, A bdi Soltani, Magnus Lofstrom, Lynette Ubois , and Paul Warren . The final draft benefited greatly from Sam Zucker man’s editorial assistance. Finally we want to acknowledge the government officials, advocates, individuals involved in the marijuana industry, a nd others in California, Colorado, and Washington who were patient and took the time to answer our questions and advance our understanding of this complicated issue . Any errors remain our own. 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