Fifteen states have legalized recreational marijuana and 36 states have legalized medical marijuana. As we move toward legalization across the nation, state policymakers should be learning lessons from the reforms we’ve seen so far.

One lesson is that ceding full control to local governments and allowing them to impose licensing in a discretionary and opaque manner is a recipe for corruption. The FBI issued a statement on the problem in 2019: “States require licenses to grow and sell the drug—opening the possibility for public officials to become susceptible to bribes in exchange for those licenses.” The problem is not commonplace licensing for health and safety, it is putting tight and arbitrary caps on the numbers of business licenses approved.

California allows local governments to ban marijuana businesses completely or to impose caps on the numbers of licenses. Only about one-third of jurisdictions in the state allow marijuana-related businesses, such as growing, manufacturing, and dispensing. In these areas, approval processes are complex and license caps are low, and since demand is high licenses are a highly valued commodity.

The Los Angeles Times describes some of the resulting problems:

Since California voters legalized recreational cannabis four years ago, allegations of conflicts of interest, bribery and bias in the permitting process have plagued cities and counties as they try to regulate the fledgling industry. The accusations have led to a series of high-profile arrests and prosecutions of local government officials and pot operators.

… A combination of factors has made the industry vulnerable to corruption.

California voters legalized the possession and sale of recreational cannabis in 2016 but left it up to cities and counties to decide whether they would allow businesses in their jurisdictions to cultivate, manufacture, distribute or sell cannabis products.

Most cities still prohibit cannabis businesses from operating within their borders, and those that do allow pot operations typically place strict limits on the number of licenses they issue as well as their locations. With permits limited, it is speculated that they could be worth millions of dollars, and competition for them can be fierce.

Cannabis businesses are also cash-intensive. Because the drug is still illegal under federal law, the companies are forced to deal mainly in cash.

Reason and Marijuana Business Daily have also reported on the connection between license caps and corruption, and I summarized a Politico investigation into the matter here. This story from San Bernadino captures some of the mess created by limited and discretionary license approvals.

This piece in the Sacramento News & Review by a former police lieutenant hits the nail on the head:

When Californians overwhelmingly voted to legalize adult-use cannabis in 2016, they also unintentionally instituted a dual licensing system for cannabis retail. Legal cannabis businesses must first obtain a permit from the city where they operate before the state will issue a license. This set-up, hailed as “local control,” empowers county supervisors and city council members throughout the state to decide if (or how many) cannabis retailers can operate within their jurisdiction.

But rather than embrace the intent of Proposition 64 and match the level of voter support with the appropriate number of cannabis dispensaries and delivery services, local officials doing the opposite. Nearly 80% of cities and counties have banned cannabis retailers, and many others have set arbitrary limits on the number of licenses. As a result, legal cannabis—whether it is medical or recreational—has failed, and will continue to fail, to integrate into California’s legitimate economy.

Currently, Sacramento, a city of 500,000 people, only allows 30 cannabis retail licenses … This number is not based on real demand. As a result of the city’s decision to restrict licenses to so few, they have become tremendously valuable commodities, essentially creating a legal license cartel. Only the most wealthy and well-connected business owners are able to obtain permits, whether by playing within the rules or by backroom deals. Small businesses have run California’s cannabis economy for decades. Shutting them out now is a slap in the face.

… It is not the role of local government to create choke points in burgeoning industries, but rather to create sensible regulations that protect public health and safety. Arbitrary caps on cannabis business licenses inherently breed corruption and increased crime. When businesses are forced to break the law, some may be more willing to sell unregulated products, or to sell to minors.

State and local policymakers should legalize marijuana and vastly liberalize licensing. Licensing for health and safety is reasonable, as are normal zoning rules for locating businesses in commercial zones. But imposing artificial license caps is asking for trouble. One marijuana industry leader got it right regarding license caps: “Competition belongs in the market, not in the license application process.”

The license issue is one of many policy mistakes regarding the young legal industry. In Massachusetts, cities are unfairly shaking down marijuana entrepreneurs with “community impact fees” and “donations” to the government. In Canada, the legalized pot industry suffers under costly taxes and restrictive regulations, with the result that black markets still thrive. If stoner and goofball actor Seth Rogen can figure this out, why can’t the politicians?

Virginia decriminalized recreational marijuana in 2020, and there is now a move to legalize. Unfortunately, legislators appear to be moving ahead with a plan that overregulates the industry and allows local license caps. As a resident, I favor legalization but fear the politicians will screw it up once again by micromanaging and stifling what should be a thriving and job-creating part of the state economy.

Read the newest Cato study my colleague Jeffrey Miron conducted with Angela Dills, Sietse Goffard, and Eric Partin that analyzes the industry and its social and economic effects.