A closer look at the economic forces driving ResponsibleOhio's controversial plan to establish 10 wholesale marijuana growers in the state-and some of the plan's potential consequences

A closer look at the economic forces driving ResponsibleOhio's controversial plan to establish 10 wholesale marijuana growers in the state-and some of the plan's potential consequences

Ohioans have hearda whole lot about pot this year. In August, ResponsibleOhio gathered enough signatures to put a constitutional amendment on the fall ballot that would legalize both medical and recreational marijuana use. The ResponsibleOhio plan-also known as Issue 3-began attracting controversy long before the coming Nov. 3 vote, sparking heated debate over issues that typically surround marijuana legalization, including how it would impact public health and safety and concern over easier access for minors. But the section of ResponsibleOhio's proposed amendment that's attracted the most controversy centers not on how marijuana would be consumed, but how it would be grown.

Issue 3 includes language limiting wholesale marijuana growth, cultivation and extraction to 10 specific growing sites (the amendment also allows residents 21 and older to grow up to four flowering plants for private use). Opponents, including Ohio Secretary of State Jon Husted, claim this restriction on licensed growing sites is paramount to writing a business monopoly into the state constitution. ResponsibleOhio executive director Ian James disagrees, saying the 10 growing sites would compete with each other as part of a regulated industry. He also points to language in the amendment that would, after four years, allow for one additional growing site to be approved per year, should demand exceed supply.

Much coverage has been given to the political fight over the proposed growing sites, partly because the 10 sites have already been claimed by ResponsibleOhio's wealthy investors-a big-business approach that doesn't sit well with many people who typically would support legalization. Why did the group decide on a limited number of sites in the first place? The answer deals with regulation and the economic realities of trying to enter a nascent industry still considered illegal by the federal government.

"When you have thousands of grow licenses, it's virtually impossible to regulate," James says. "We said, 'Let's choose 10 over the first four years so that it can be properly regulated, and if they don't meet demand, the state can add more licenses.' " (The method by which new grow site owners would be selected would be left up to the Ohio Marijuana Control Commission established in the amendment.) James says the group did look at other states for guidance, but the specific number was also influenced by the investors ResponsibleOhio approached who were willing to back the amendment.

"When you legalize marijuana in any state, these [businesses] aren't going to be small mom-and-pop organizations," James says. "These are going to be people and companies that have incredible financial backing because they have to; under the current laws and regulations, banks don't want to touch them."

That economic pragmatism is one of the primary arguments ResponsibleOhio uses to defend its approach. But banking issues are only one thread in the tangled web of regulations that surround marijuana commerce. Taxes are another problem, notes Justin Breidenbach, a professor of accounting at Ohio Wesleyan University who has spent the past two years studying the legal marijuana industry in states like Colorado and Washington. Businesses selling Schedule I and Schedule II drugs are forbidden from deducting most expenses, forcing them to scale up. "The only way to get around the tax issues is to go very big and scale very high," Breidenbach says. "The margins they're dealing with are like a grocery store-you have to grow and sell a lot to make money."

And while Ohio growers would likely have to go big to survive, Breidenbach still worries supply could be an issue. Some states, such as New York, have strict limits on growing sites. But, Breidenbach says, New York legalized only medical marijuana use. Colorado and Washington, where medical and recreational use are both legal, each have hundreds of licensed growers.

Of course, those numbers don't paint the whole picture. According to Breidenbach's research, if you look at growing acreage in relation to the state's population, the 10 proposed sites potentially could supply enough to meet demand. On the other hand, Breidenbach also believes that based on what's happened in other parts of the country, Ohio-grown marijuana would be sought by residents of neighboring states, where the drug is still illegal. "Are the 10 growing sites enough? That's a wide-open question," he says.

The amendment does allow for more growing sites to be added, but "timing-wise, that creates some issues," Breidenbach says, "because you've got a period of four years where demand maybe isn't being met. It's also going to take at least a year for a new facility to get up and running, so that's more like five years of unmet demand. And that's a long time in the business world."

Unmet demand wouldn't just be an inconvenience for consumers-it would have the potential to create rampant overpricing, which would likely lead people to buy cheaper marijuana from home growers not licensed to sell their product. In the industry, this is known as the "gray market," and it creates a host of regulation problems, including issues with product safety testing and enforcing the rule that marijuana can't be sold to minors.

Of course, the economic forces that drove ResponsibleOhio's decision to create a limited number of growing sites could disappear in the future, should the federal government give in to changing cultural attitudes and legalize marijuana on a national level. "If that federal tax effect changes, which it might in the future, especially if a state like Ohio legalizes, then these growers are really going to reap in the rewards," Breidenbach says. "You'd be more like a software company in terms of profits."

Many Americans assume a regulated, for-profit model similar to the alcohol industry is the only way to legalize marijuana, but national drug policy experts say the for-profit model is not necessarily the best option. "One of the issues of the for-profit model is Pareto's law, or the 80-20 rule," says Beau Kilmer, co-director of the RAND Drug Policy Research Center. "When it comes to marijuana, 80 percent of profits come from only 20 percent of users," he explains, referencing a 2014 study he helped conduct for the White House Office of National Drug Control Policy titled "What America's Users Spend on Illegal Drugs: 2000–2010."

According to Kilmer, that figure means for-profit marijuana growers have a vested interest in focusing advertising on heavy users. And while Issue 3 does include some restrictions on advertising, the United States' commercial free speech rules mean advertising cannot be banned entirely, as it is in countries like Uruguay. Kilmer adds if we look outside the U.S., we'd see other potential models that are not currently part of the conversation here, including state monopolies, nonprofit co-ops and for-benefit corporations that include social and environmental goals in their mission.

In terms of the policy spectrum, Kilmer says a regulated, for-profit industry isn't the most extreme option. Kilmer and Breidenbach agree a regulated industry is certainly safer than an unregulated one. However, at this stage, no one truly knows the best approach to creating a regulated marijuana industry, and any new plan carries a certain amount of risk. On Nov. 3, Ohio voters will decide how much risk they want to take in order to have legal access to marijuana-and if they want to write ResponsibleOhio's for-profit model into the state constitution.