When “Colonel” Edwin Drake moved to Titusville, Pennsylvania, in 1857 and began searching for oil, many of the local people thought he was crazy. Hired by the newly formed Seneca Oil Company because of his likeability and optimism rather than for any technical abilities, Drake began by digging trench after trench, the usual method back then, each time anticipating that this dig would be the one that started the rich black gold flowing. But his efforts met with failure.
So too has Pennsylvania’s cannabis industry seen its share of setbacks and false starts in its attempts to legalize adult-use cannabis.
We’ve Been Here Before
On February 6, 2024, Governor Josh Shapiro called for the Legislature to provide him with a bill approving adult-use cannabis, to be effective July 1, 2024, with licensed shops launching sales starting January 1, 2025. The governor’s budget proposes a tax of 20% on the wholesale price of cannabis products, which would be run through the state’s liquor store system. It estimates adult-use cannabis will bring in $250 million in annual revenue within five years. The governor’s announcement has produced much excitement in the cannabis community. Many anticipate that adult-use cannabis must be just around the corner.
However, we’ve been here before. In 2018, then Governor Tom Wolf tweeted, “I think it is time for Pennsylvania to take a serious and honest look at legalizing recreational marijuana.” Wolf then followed this up with a 70-stop tour in 2019, visiting all 67 counties, and gathered input for his vision. After the tour, he announced that 68% of Pennsylvanians supported adult-use legalization. He asked for the Legislature to decriminalize cannabis, expunge prior convictions, and consider legislation to legalize adult-use. In 2020, Wolf held a press conference and called for the Legislature to act. Then … nothing.
Digging Deeper
To understand the dynamics at play in the adult-use movement in Pennsylvania, and to correctly predict the timeline for success, we must follow Edwin Drake’s example. Once the Colonel realized that trench-digging wouldn’t work, he studied the land and determined a deeper-dig was needed.
We too must dig deeper and study the competing visions being presented for Pennsylvania’s adult-use cannabis. It’s also important to note that times have changed since former Governor Wolf pushed for adult-use. At that time, both houses of the state Legislature were against it. Now, the majority of the House of Representatives supports adult-use, while a majority of senators still oppose it.
House Bill 1080
Representative David Delloso introduced House Bill 1080 on May 2, 2023, which would legalize adult-use cannabis and allow it to be sold through the current state store system. The bill’s memorandum notes that, “A Pennsylvania Auditor General report projects that [adult-use] cannabis could be an $1.66 billion industry that generates hundreds of millions in tax revenue.”
HB 1080 legalizes cannabis and provides for its adult-use purchase. The 19-page document also creates a 10% gross receipts cultivation tax and a 19% excise tax on retail sales for a comparatively high rate of taxation (see tax comparison table below). HB 1080 allows for expungement of any arrest or conviction under the state’s Controlled Substance Act.
Pennsylvania is an alcoholic beverage control state, and most of the state’s wine and liquor consumed off-premises (non-restaurant) are sold through the 600-plus state-owned Fine Wine & Good Spirits stores. (Restaurants may sell beer to be taken home.) If HB 1080 passes, the sales of adult-use cannabis and any profits associated with those sales would belong exclusively to the state.
The same day it was introduced, HB 1080 was referred to the House Health committee, where it has only recently begun to be discussed, with testimony on adult use heard in November and December of 2023 as well as information presented in March 2024 on the criminal justice implications of adult-use cannabis legalization.
Senate Bill 846
On May 9, 2023, Senators Dan Laughlin and Sharif Street, representing both sides of the political aisle, introduced Senate Bill 846. SB 846 is a 224-page document (compared to HB 1080’s 19 pages) and goes into much greater detail to spell out its adult-use cannabis plans for Pennsylvania.
SB 846 differs fundamentally from HB 1080 in that it provides for the adult-use sale of cannabis through the state’s existing medical cannabis system, which includes 178 dispensaries. In addition, it allows for an 8% sales tax on cannabis products, which is 2% more than the standard sales tax, coupled with a 5% excise tax, for a total combined cannabis-specific tax rate of 7% of the retail sale price.
SB 846 was referred to the Senate Law & Justice committee the same day it was introduced and has not seen movement since then.
License Fees Compared
HB 1080’s license fees are much less expensive than SB 846’s. HB 1080 allows for an application fee of not more than $5,000 and annual fees of $700.
SB 846 has two sets of fees, one for grower/processors and another for dispensaries. Grower/processors would have an application fee of $10,000, an initial permit fee of $200,000 (refundable if not approved), and a $10,000 annual renewal fee. SB 846 also requires that the grower/processor have $2 million in business capital, $500,000 of which must be on deposit with a financial institution.
Dispensaries under SB 846 fare better, but the fees are still higher than HB 1080. Dispensaries under SB 846 would have an application fee of $5,000, an initial permit fee of $30,000 per location (refundable if not approved), and a $5,000 annual renewal fee. SB 846 requires that the dispensary have $150,000 in business capital on deposit with a financial institution.
Comparing Taxation
As the markup on cannabis products for retail sale is sometimes significantly more than 100% of the wholesale price, this rate of 7% of retail sales could end up being similar to Governor Shapiro’s 20% tax on the wholesale price of cannabis products. Both would be significantly less taxation than HB 1080.
As we noted in a recent commentary on New York’s proposal to cut its state cannabis excise tax, studies have shown consumers are willing to pay no more than a 10% to 15% premium over the illicit market to purchase state-legal cannabis. SB 846, at 7%, would be most likely to support a strong legal adult-use market, while Governor Shapiro’s suggested 20% wholesale tax (equivalent to 10% retail if a business does a 100% markup) would push a legal business right to the edge but might not cause consumers to seek out the illicit marketplace. HB 1080 would be a business-killer.
Social Equity Aspects of Each Bill
Both bills contain social equity provisions, although HB 1080 only allows for expungement of possession convictions.
SB 846, however, spells out a detailed social equity program for disadvantaged businesses which include fee waivers and grants or low-interest-rate or zero-interest-rate loans from a Cannabis Business Development Fund. SB 846 defines a “social and economic equity applicant” as one with a maximum annual income of $75,000 or having financial assets less than or equal to $250,000. The disadvantaged applicant must also have at least 75% ownership and control by one or more individuals who have a) resided for five of the last 10 years in a disproportionately impacted area; or b) been arrested for or convicted of cannabis possession; or c) are members of a family that has had a member that has been arrested for or convicted of possession.
Questions Abound on HB 1080
Supporters of HB 1080 are quick to point out that adult-use sales will be conducted and easily monitored by state-operated stores, thus avoiding sales by criminal actors.
However, such close control comes at a price. The Pennsylvania Liquor Control Board will be able to fix the wholesale and retail prices of cannabis and cannabis products. So, the cultivators, testers, and manufacturers who will be licensed to provide adult-use cannabis to the state’s retail stores will have the state deciding how profitable they can be.
Current medical dispensaries wonder whether the business landscape under HB 1080 would allow them to survive. Medical patients would still only be affected by the current 5% wholesale cannabis tax (as opposed to a 10% wholesale tax for adult-use under HB 1080) and wouldn’t be subject to the 19% retail tax. But even with the significant tax savings, would medical dispensaries be cut out of Pennsylvania cannabis’ growth entirely and even lose a significant portion of their customer base on top of this?
If California is any example of this, the state went from an estimated medical cannabis population in 2010 (pre-adult-use) of 750,000 to 1,125,000 patients, to the current status where medical sales make up only 2% to 5% of cannabis sold in the state. And this despite the fact that medical patients in that state pay no sales tax and a reduced city tax in some cities like Los Angeles that tax cannabis.
The outlook for medical dispensaries looks bleak under HB 1080.
Both Bills Have Their Advocates – And Detractors
Both bills are backed by different stakeholders. HB 1080 has the support of the United Food & Commercial Workers International Union, which represents state liquor store clerks as well as some medical cannabis workers. SB 846 is supported by many multistate cannabis companies including Trulieve and Cresco Labs, among others.
Further complicating potential approval of adult-use cannabis in the Keystone State is the conflict between the large multi-state operators and those that believe opportunities must be given to small businesses and individuals harmed by the war on cannabis by providing for separate adult-use licensing. Allowing adult-use cannabis products to be sold by already-established medical cannabis companies would give multi-state operators an advantage says former Massachusetts cannabis regulator Shaleen Title. Though it would provide access to “legal products more quickly,” it “reduces competition and hurts consumers in the long term” by increasing prices and reducing the number of distributors.
Decriminalization: Layers of Complication
Even a topic as basic as decriminalization of possession has layers of complication. Currently, possession of less than 30 grams of cannabis is a misdemeanor punishable by up to 30 days in jail and a fine of $500. On January 12, 2024, Senator Street co-sponsored Senate Bill 1028 to decriminalize possession of small amounts of cannabis and make it a summary offense with a fine of $25.
While many in the cannabis community are calling for decriminalization and even Scott Bohn, executive director of the state police chiefs association and member of the state’s Medical Marijuana Advisory Board, recently stated, “We could certainly live with decriminalization,” other cannabis leaders are pushing back.
In a presentation before the House Health committee, cannabis industry executives told lawmakers they want the state to keep cannabis possession illegal until the recreational industry has been established. They also want the state to crack down on sales of hemp-derived THC products, some of which are as psychoactive as adult-use products but which are currently outside the scope of state and federal laws. Both actions are seen as giving a nascent adult-use industry a chance to gain a foothold against unlicensed competition.
Pushing back against too-soon legalization was also echoed by SB 846 co-sponsor Laughlin, who is worried decriminalization would create a black market.
Complex Issues
The struggle to approve adult-use cannabis in Pennsylvania is a complex issue. And with Pennsylvania one of the seven “battleground states” in the upcoming presidential election, partisan conflict and division is not likely to lessen, making the passage of adult-use legislation, which will require bipartisan support, all the more difficult.
Many Pennsylvanians, however, see adult-use cannabis as inevitable. Cannabis entrepreneur Claudia Post, named by Philadelphia Magazine as one of the most influential people in Pennsylvania cannabis, sums up their perspective: “People are buying their recreational cannabis across state lines. The money is seeping out of our state. At the same time, there are budget shortfalls in transportation, infrastructure, schools. Where is the money going to come from to meet those shortfalls? It’s going to come from legalized recreational cannabis.”
Perhaps one can do worse than look to Edwin Drake’s determination to wrest oil from the sandy soil of Titusville to predict the outcome of today’s battle for adult-use cannabis. After realizing he needed to look deeper underground for oil, Drake spent all Seneca Oil’s money retooling a steam engine to operate a specialized drill bit. With the aid of local Titusville merchants who provided him and his family personal credit so he could survive, Drake began to drill in the summer of 1859. Water filled his hole, but he solved that problem too, and on August 28, 1859, at a depth of 70 feet and two years after he began his search, he finally struck oil. Drake’s Pennsylvania well was the first oil well the world had ever seen, and it kicked off Pennsylvania’s oil boom.
Like Edwin Drake, Pennsylvania’s cannabis industry is going to have to be persistent to see adult-use cannabis legalized. They may have to devise new legislative and political methods to get it done. But in the end, their persistence is sure to be rewarded, and the “green gold” will start to flow, providing cannabis to all Pennsylvania’s citizens and abundant taxes for the public good.