LEGISLATIVE RESEARCH SERVICES - Alaska Senate...marijuana is legal have time to establish and refine...

LEGISLATIVERESEARCHSERVICESAlaskaStateLegislature (907)465‐3991phoneDivisionofLegalandResearchServices (907)465‐3908faxStateCapitol,Juneau,AK99801 [email protected]

ResearchBriefTO: Senator Lesil McGuire

FROM: Chuck Burnham, Legislative Analyst

DATE: November 28, 2014

RE: Establishing Mechanisms for the Regulation of Marijuana in Alaska

LRS Report 15.099

You asked numerous questions about the legalization and regulation of recreational marijuana in Alaska under Ballot Measure 2, approved in the 2014 general election. Below we list your questions in turn and follow each with our responses.

As you know, in the recent general election, Alaska and Oregon became the third and fourth states, behind Colorado and Washington, to legalize the recreational use of marijuana for adults aged 21 and over. These initiatives mark the first successful efforts in the U.S. to establish a regulatory framework for recreational marijuana. Although Colorado and Washington voters approved their respective initiatives in 2012, it has been less than a year since legal sales of the drug began. In other words, these are very early days in this new era and answers to several of your questions remain unclear as circumstances rapidly evolve. Therefore, although we attempt to address each of your questions, a number of our responses are necessarily incomplete and will remain so until regulatory authorities in each of the four states where recreational marijuana is legal have time to establish and refine their respective regulatory systems.1

Compare Ballot Measure 2 with retail marijuana laws in Colorado, Oregon, and Washington Table 1 (attached) compares several provisions of the four state measures that have legalized recreational marijuana. (We discuss a number of these provisions in further detail throughout this report as they relate to Alaska.) The measures share similarities, such as prohibiting sales to persons under age 21 and disallowing marijuana use in public, but substantial differences exist. For example, Washington is alone among the four states in forbidding any amount of home cultivation for private use. Alaska and Oregon levy excise taxes according to weight sold at the wholesale level, while Colorado and Washington base taxes on the value of both wholesale and retail transactions. Alaska is the only one these states that does not yet have a designated revenue expenditure scheme for marijuana taxes. Licensure fees, where they have been established, vary widely both among and within states —from $1,000 to $10,800—depending on the type of license in question. In Alaska, Colorado, and Oregon, municipalities can exert substantial control over marijuana establishments through zoning and other rules, and can prohibit the industry completely through ordinance or ballot measure. Washington’s law explicitly preempts local ordinances; however, that provision has been brought into question by a non‐binding opinion of the state Attorney General and is now the subject of litigation.2 More generally, the measures differ in their level of detail and specificity. A simple indicator of this is the fact that voters in Oregon and Washington considered initiatives of 38 pages and 65 pages, respectively, while the electorate in Alaska and Colorado cast ballots on respective measures of 8 pages and 9 pages. The shorter initiatives allow for greater flexibility in the process of promulgating regulations to govern marijuana industries but may also open the door on the possibility that supporters of those measures will end up with a regulatory regime that they did not anticipate.

1 In this report we consider only state legal and regulatory issues. As you know, the legalization of recreational marijuana at the state level

conflicts with federal drug, tax, and commerce laws. Although the administration of President Obama has thus far declined to challenge the new

state laws, it is not clear what federal policy will be in the future. This adds an obvious level of uncertainty as state regulatory schemes are

developed.

2 Washington Attorney General Opinion 2014 No. 2, January 16, 2014, http://www.atg.wa.gov/pressrelease.aspx?id=31774#.VHjCizF0yUk. A news article on the pending litigation is available at http://www.nytimes.com/2014/06/12/us/with‐marijuana‐legalized‐a‐city‐in‐washington‐state‐

says‐not‐so‐fast.html?_r=0.

LEGISLATIVERESEARCHSERVICES,LRS15.099 NOVEMBER28,2014—PAGE2ESTABLISHINGMECHANISMSFORTHEREGULATIONOFMARIJUANAINALASKA

Are retail recreational marijuana establishments mandated in Alaska’s initiative? Nothing in the “Act to Tax and Regulate the Production, Sale, and Use of Marijuana” (hereinafter, the Act) directs any public or private organization to establish retail outlets for marijuana sales in Alaska. Rather, several sections of the Act create the framework for a private‐sector retail industry by directing state regulators to establish a system of licensing and control (§§ 17.38.070‐100) under which that industry will function. Section 17.38.090 specifically bars regulators from prohibiting the operation of “marijuana establishments.” Although not explicit, the initiative appears to assume that demand for retail marijuana exists and that, under free market principles, businesses will be developed to meet that demand.

What would happen if the Alaska Legislature took no action to implement Ballot Measure 2? The Act mentions the legislature just once—providing it the authority to establish a Marijuana Control Board (in § 17.38.080, which we discuss in greater detail below).3 Unless and until the legislature establishes such a Board, authority for rulemaking and the promulgation of regulations is vested in the Alcoholic Beverage Control (ABC) Board. Pursuant to § 17.38.090, the ABC Board has nine months from the effective date of the Act to adopt regulations in accordance with the parameters set out in Ballot Measure 2.4 Should the designated Control Board fail to perform as directed, regulation falls to local governments under § 17.38.110. The local regulatory authority would then administer the recreational marijuana industry within its political boundaries pursuant to the framework and provisions of the Act. It’s worth noting, however, that § 17.38.110(c) reads, “Nothing in this section shall limit such relief as may be available to an aggrieved party under AS 44.62, the Administrative Procedure Act.” It is not immediately clear who may have standing as an “aggrieved party” should the State’s designated regulatory authority fail to implement the Act, or if such parties could compel that Board to take action. For an opinion on this matter, we recommend that you contact Legislative Legal Services.

What is the procedure for the Alaska Legislature to establish a Marijuana Control Board (MCB)? What would its composition be, how would members be appointed, and what would be its relationship to the ABC Board?

Article II, Section I, of the Alaska Constitution vests all of the legislative power of the state with the 60‐member Alaska Legislature. That said, Dr. Gordon Harrison, author of Alaska’s Constitution: A Citizen’s Guide, writes that all states’ legislatures routinely delegate authority. According to Dr. Harrison,

The courts have allowed the [Alaska] legislature to delegate power to administrators if this power is accompanied by explicit guidelines and policy directions. Delegations of legislative power must be sufficiently narrow and specific to give the administrative agent reasonable standards to follow and the courts a basis for determining when the agent has exceeded the bounds of the delegated authority. Measures that fail this test are unconstitutional . . . On the other hand, the Alaska Supreme Court has upheld the legality of several legislatively created boards that were challenged on the grounds (among others) that their enabling statutes delegated excessive authority to

3 To answer your question more directly, Ballot Measure 2 does not appear to contemplate a significant role for the legislature in designing the

regulatory framework. This is by no means an exceptional circumstance, however. As you know, were the legalization of recreational marijuana a legislative measure, executive branch agencies would promulgate and enforce regulations in accordance with the enacted law. In the case of initiatives, voters, in effect, serve as the legislative apparatus directly, as is contemplated by AS § 15.45.010. The legislature, of course, maintains its regulatory review functions under AS § 24.05.182 and AS § 44.62.320. Pursuant to Article XI, Section 6, of the Alaska Constitution, the legislature cannot repeal an initiative within two years of the effective date; however, the statutory provisions brought into effect by an initiative can be amended by the legislature at any time. The Alaska Supreme Court has said that amendments “tantamount to repeal” in the first two years of initiative taking effect are unconstitutional (Warren v. Thomas, 568 P.2d 400, 1977).

4 Pursuant to AS 15.45.220, successful initiatives become effective 90 days from the date of certification of the vote by the Alaska Division of Elections, which occurred November 26, 2014. Therefore, the ABC Board or the Marijuana Control Board, if one is established by the legislature,

effectively has one year from that date to promulgate regulations.


administrators (see, for example, DeArmond v. Alaska State Development Corporation, 376 P.2d 717, 1962; and Walker v. Alaska State Mortgage Association, 416 P.2d 245, 1966).5

So, at a simplistic level, in order to establish the MCB, the legislature must draft and approve statutes creating an MCB that meet constitutional requirements. Ballot Measure 2 is silent on the Board’s composition, appointment authority, and relationship to other regulatory bodies. Those issues are policy questions left to the legislature. It is reasonable to assume, however, that the existing regulation regime for alcohol is a likely model, and the initiative seems to indicate as much by making the ABC Board the default regulatory authority for recreational marijuana. The enacting legislation for the ABC Board is codified at AS §§ 04.06.010‐110.

What can the legislature do to direct the MCB in the areas of marketing, packaging, availability, and licensing of retail marijuana products?

Pursuant to § 17.38.090, the regulatory authority for recreational marijuana is directed to adopt regulations that include the following:

Procedures for the issuance, renewal, suspension, and revocation of a registration to operate a marijuana establishment;

A schedule of application, registration, and renewal fees, provided that application fees shall not exceed $5,000, with this upper limit adjusted annually for inflation, unless the board determines a greater fee is necessary to carry out its responsibilities under this chapter;

Qualifications for registration that are directly and demonstrably related to the operation of a marijuana establishment;

Security requirements for marijuana establishments, including for the transportation of marijuana by marijuana establishments;

Requirements to prevent the sale or diversion of marijuana and marijuana products to persons under the age of 21;

Labeling requirements for marijuana and marijuana products sold or distributed by a marijuana establishment;

Health and safety regulations and standards for the manufacture of marijuana products and the cultivation of marijuana;

Reasonable restrictions on the advertising and display of marijuana and marijuana products; and

Civil penalties for the failure to comply with regulations made pursuant to this chapter.

The above list is not exhaustive of the areas in which the legislature, through enabling legislation, can direct regulators. As we mentioned above, the Act’s section on rulemaking only prohibits rules that make operation of retail marijuana establishments “unreasonably impracticable,” which is defined in § 17.38.900(14) as meaning that the

Measures necessary to comply with the regulations require such a high investment of risk, money, time, or any other resource or asset that the operation of a marijuana establishment is not worthy of being carried out in practice by a reasonably prudent businessperson.

The precise measures that might be considered to be unreasonably impracticable are not delineated. The scope of regulatory authority provided to the ABC Board in its oversight of the alcoholic beverage industry may provide some indication, however. Pursuant to AS § 04.06.100, the ABC Board may address the following:

5 Gordon Harrison, Ph.D., Alaska’s Constitution: A Citizen’s Guide, 5th Ed., p. 47, http://w3.legis.state.ak.us/docs/pdf/citizens_guide.pdf.


Employment, conduct, and duties of the director and of regular and contractual employees of the board;

Procedures for the issuance, denial, renewal, transfer, revocation, and suspension of licenses and permits;

Terms and conditions of licenses and permits issued;

Fees for licenses and permits issued for which fees are not prescribed by statute;

Conduct of regular and special meetings of the board;

Delegation to the director of routine administrative functions and powers;

The temporary granting or denial of issuance, transfer, and renewal of licenses;

Manner of giving any notice required by law or regulation when not provided for by statute;

Requirements relating to the qualifications of licensees, the conditions upon which a license may be issued, the accommodations of licensed premises, and board inspection of those premises;

Making of reports by wholesalers;

Purchase of fidelity bonds by the state for the director and the employees of the board;

Prohibition of possession of alcoholic beverages by drunken persons and by minors;

Required reports from corporations licensed under this title, including reports of stock ownership and transfers and changes of officers and directors;

Creation of classifications of licenses or permits not provided for in this title;

Establishment and collection of fees to be paid on application for a license or permit;

Required reports from partnerships and limited partnerships licensed under this title, including reports of transferred interests of 10 percent or more; and

Required reports from limited liability organizations licensed under this title, including reports of any change of managers, and the transfer of a member's interest if the transfer equals 10 percent or more of the ownership of the limited liability organization.

As you can see, the scope of these regulations, which includes the ability to determine the “terms and conditions of licenses and permits,” provides the ABC Board with very broad authority. The Board has used this authority to, among numerous other actions, establish a multi‐tiered licensing regime, restrict hours of operation, limit container sizes, determine location of licensed facilities, implement training requirements for servers, issue specifications for advertising, and impose numerous limitations on the serving of alcohol to or around minors. Of course, it is unclear how courts will treat a future challenge to a given regulatory requirement but, clearly, there is ample precedent in Alaska for a tightly regulated industry that serves intoxicating substances.

What will be the amount of licensing fees, how will regulatory agencies be funded, and at what cost? As we noted above, the rulemaking requirements of § 17.38.090(a)(2) include the following:

A schedule of application, registration and renewal fees, provided, application fees shall not exceed $5,000, with this upper limit adjusted annually for inflation, unless the board determines a greater fee is necessary to carry out its responsibilities under this chapter.


The provision at once sets a fee limit and gives the Board the authority to exceed it. This contradictory directive may be a nod to the fact that nobody really knows how much it will cost to regulate this as yet nonexistent industry.6 Presumably, regulatory expenses will be a factor in establishing the cost of licensure and the fees collected will fund the regulatory agency; however, those funding mechanisms are not contemplated by the Act. A document jointly prepared in early 2014 for the ABC Board by executive branch agencies that may be impacted by the enactment of Ballot Measure 2 attempts to quantify some of the first‐year regulatory costs. The departments most likely to incur direct regulatory costs are Commerce, Community, and Economic Development (DCCED), which houses the ABC Board, and the Department of Revenue (DOR), which will collect taxes on sales. The report estimates first‐year costs of roughly $1.5 million for DCCED and $650,000‐$800,000 for DOR. The figures do not include the costs of establishing a Marijuana Control Board. Further, the contributors to the report caution that there are “numerous unknowns in the state’s implementation of this initiative.” The agencies therefore recommend that their estimates be regarded as “illustrative.” We include a copy of the agency report as Attachment A.

What degree of control will municipalities have over licensing and regulation? Pursuant to AS § 17.38.110, local governments may prohibit cultivation, manufacture, and/or retail sales of marijuana by ordinance or voter initiative. Those governments may similarly enact measures to limit the time, place, manner, and number of marijuana establishments as long as they do not conflict with provisions of the Act. As we mentioned above, if the state regulatory body fails to establish regulations and/or start issuing licenses within the timeframe established by law, local governments have the option of establishing their own regulatory authorities to do so.

What are the projected tax revenues to the state? The State of Alaska has not published a projection of tax collections from the sale of recreational marijuana and very few robust independent analyses have been attempted, with most being not much more than “back of the envelope” affairs. In many ways, the math of the issue is very simple—tax revenues equal the weight of marijuana at the wholesale level multiplied by the $50 per ounce excise tax imposed by § 43.61.010.7 The problem is that no one knows with any degree of certainty how much demand for marijuana exists currently, and what portion of that demand will transfer to the legal retail market. A primary variable that will drive market demand is the retail price, which, in turn, will be impacted by supply issues, licensing and regulatory costs, and the price difference between legal sources of marijuana and the black market. If legal marijuana is more expensive than other sources, demand for retail products will obviously be weakened. To fill the information vacuum left by the lack of an official revenue forecast, Colorado’s Marijuana Policy Group (MPG) published a report on the topic in October 2014.8 The MPG is “a consortium of university researchers and economic consultants specializing in marijuana market design and policy” that provides market analyses for the Colorado Marijuana Enforcement Division.9 The MPG study of market demand in Alaska finds that, if the pre‐tax retail price of marijuana is similar to that in Colorado ($14 per gram), first‐year retail sales would total roughly $55.6 million and generate about $7 million in excise tax revenue. Prices would decrease and revenues grow as the market matures, reaching approximately $107 million in

6 The ABC Board maintains a frequently asked questions section on Ballot Measure 2 on its website at

http://commerce.state.ak.us/dnn/abc/resources/MarijuanaInitiativeFAQs.aspx.

7 It is important to note, however, that the state will also collect corporate income taxes from marijuana businesses, and municipalities with

local sales taxes will also receive revenue.

8 According to a report by the Alaska Dispatch News (ADN), requests to the administration of Governor Parnell for estimates of tax collections

were refused, and executive branch agencies were prohibited from using state resources to make such an estimate

(http://www.adn.com/article/20140911/no‐official‐forecast‐planned‐revenue‐alaska‐marijuana‐taxes‐anyones‐guess).

9 The MPG states in its report that it took no position on the Alaska ballot measure and was not paid for its work. Instead, it developed the report to “help Alaska voters understand potential sales and tax revenues under a legal marijuana regime.” The Group describes itself as a

“collaborative effort between the University of Colorado Boulder Business Research Division (www.leeds.colorado.edu/brd) and BBC Research &

Consulting (www.bbcresearch.com) in Denver. Both entities have offered custom economic, market, financial and policy research and consulting

services for over 40 years.”


sales and $23.8 million in tax revenue to the state by 2020 at retail prices of about $8 per gram. To provide some context, in fiscal year (FY) 2013 alcohol excise tax collections in Alaska totaled roughly $39.6 million on sales of 18.3 million gallons. Of the taxes collected, about half—$19.8 million—were dedicated to substance abuse treatment and prevention programs and the remainder were general funds.10 We include the MPG market study for Alaska as Attachment B. It is important to reemphasize that there is simply no way to accurately estimate tax revenues from a regulated market of a product that, until very recently, was illegal everywhere. Every economist and policy analyst whose research or comments we reviewed for this report stressed that there are far too many uncertainties in basic economic variables to allow for reliable estimates of sales or revenues. Taylor Bickford, spokesman for the primary backers of Ballot Measure 2, told the Alaska Dispatch News that it would be “wildly irresponsible” to make tax and revenue estimates.11 Although this language may be a bit strong, we nonetheless agree that projections related to Alaska’s nascent marijuana market are speculative.

What standards are in place with regard to driving under the influence (DUI) of marijuana? Driving under the influence of marijuana is currently illegal across the country, including Alaska, but laws vary from state to state. Per se statutes, like Alaska’s, take a zero tolerance approach, criminalizing driving with any amount of controlled substances in the bloodstream, including tetrahydrocannabinol (THC), which is the psychoactive substance in marijuana. Our cursory review identified 12 other states with similar zero tolerance laws.12 Alternatively, some states designate a specific threshold of a substance that maybe present in the driver’s system. We identified nine states—Colorado, Montana, Nevada, North Carolina, Ohio, Pennsylvania, South Dakota, Virginia, and Washington—with laws criminalizing having specific amounts of THC in a driver’s system. For example, Nevada and Ohio have thresholds of two nanograms of THC per milliliter of blood, while Colorado, Montana, and Washington allow five nanograms per milliliter. Proponents of per se laws note that such measures have been applied to commercial drivers in the U.S. by federal law for over 20 years and have proved effective.13 Additionally, such laws are widely used in many countries in the developed world outside the U.S. including the E.U., Canada, Australia and New Zealand. Advocates of such measures also maintain that a benefit of a per se regime is that prosecutors do not have to meet more complex and difficult to prove standards to establish guilt.14 Opponents of per se laws argue that they are potentially unfair because drivers can be charged with and convicted of DUI for operating a motor vehicle while not actually being impaired. For example, an individual who smokes marijuana on Friday night and gets pulled over by law enforcement while driving on Saturday may not be impaired but may still hold detectable amounts of THC.15 In a state with per se laws this driver could be found guilty of DUI. Another commonly raised concern is that people metabolize THC at different rates and the degree of impairment varies considerably according to a number of

10 Alaska Department of Revenue, Tax Division, 2013 Annual Report, pp. 25‐26 (pp. 13‐14 of the .pdf file),

http://www.tax.alaska.gov/programs/documentviewer/viewer.aspx?1095r.

11 Susanna Caldwell, “With No Official Forecast Planned, Revenue from Alaska Marijuana Taxes is Anyone’s Guess,” ADN, September 11, 2014,

http://www.adn.com/article/20140911/no‐official‐forecast‐planned‐revenue‐alaska‐marijuana‐taxes‐anyones‐guess.

12 These states are Arizona, Delaware, Georgia, Illinois, Indiana, Iowa, Michigan, Oklahoma, Oregon, Rhode Island, Utah, and Wisconsin. We identified these states using a variety of sources including the Governors Highway Safety Association (GHSA) and the National Conference of State

Legislatures (NCSL). A document from GHSA from August 2014 on per se drug impaired driving laws is available at

www.ghsa.org/html/stateinfo/laws/dre_perse_laws.html. Similar data with slight discrepancies due to changes in laws after the information was compiled is available from the National Conference of State Legislatures (NCSL) at www.ncsl.org/documents/transportation/persechart.pdf. This

document includes relevant statutory citations.

13 Information on this law from the Federal Motor Carrier Safety Administration can be viewed at www.fmcsa.dot.gov/overview‐drug‐and‐

alcohol‐rules and www.fmcsa.dot.gov/driver‐safety/drug‐alcohol‐testing/what‐if‐i‐fail‐or‐refuse‐test.

14 Among our sources was Corrine Shea, director of communications, Institute for Behavior and Health, an entity that promotes, among other

things, strong drugged driving laws (www.ibhinc.org). Ms. Shea can be contacted at 301‐852‐9382.

15 In April 2014, the Arizona Supreme Court heard a case similar to this hypothetical. In Arizona v. Shilgevorkyan the court ruled to dismiss a

DUI charge against a driver who admitted to smoking marijuana the night before being pulled over and whose subsequent blood test detected the

presence of THC. An Associated Press article on the case can be viewed at www.thedailychronic.net/2014/30788/arizona‐supreme‐court‐no‐dui‐for‐

marijuana‐unless‐person‐is‐actually‐impaired/.


factors specific to the individual driver in question; therefore, it can be problematic to determine if a person is impaired based strictly upon THC levels. Current Alaska Law

In Alaska, a person is guilty of DUI if he or she operates a motor vehicle while under the influence of an alcoholic beverage, intoxicating liquor, inhalant, or any controlled substance, alone or in combination (AS 28.35.030[a][1]). Alaska statute does not define a legal limit for THC in drivers.16 The impaired driving statutes do not distinguish among different types or compounds of THC, nor does state law establish a permissible “grass to gas” timeframe for drivers. In most cases, if a motorist is pulled over by law enforcement in Alaska and the officer believes the driver is affected by marijuana or any other controlled substance, a court order is required to obtain a blood or urine sample. Alaska, like four other states (Alabama, Massachusetts, New Jersey, and West Virginia), does not extend the concept of “implied consent” to driving under the influence of a controlled substance except in instances of crashes involving serious injury or death.17 By contrast, under the doctrine of implied consent in Alaska, a driver suspected of driving under the influence of alcohol who refuses to be tested would generally face the same penalties as a person found guilty of DUI.18 Under current law, a driver in Alaska who is found to have THC present in the body will likely be prosecuted for driving under the influence. Unlike laws in a number of other states, Alaska statutes contain no exceptions regarding such driving offenses for individuals who are using marijuana for medical reasons. Finally, nothing in Ballot Measure 2 addresses whether a legal limit (zero tolerance or otherwise) will be assigned to THC levels for impaired driving. The only mention of marijuana use and driving in the measure reads as follows:

AS § 17.38.120(b) Nothing in this chapter is intended to allow driving under the influence of marijuana or to supersede laws related to driving under the influence of marijuana.

Washington and Colorado DUI Laws Pertaining to THC Levels

Washington laws set a DUI limit for THC in the blood at five nanograms per milliliter of blood. Additionally, the statute stipulates that this limit remains in effect for two hours after driving. The measure also states that a person can be charged with DUI even if he or she is entitled to use a drug under the laws of the state (medical marijuana, for example).

Revised Code of Washington § 46.61.502

1) A person is guilty of driving while under the influence of intoxicating liquor, marijuana, or any drug if the person drives a vehicle within this state: (a) And the person has, within two hours after driving, an alcohol concentration of 0.08 or higher as shown by analysis of the person's breath or blood made under RCW 46.61.506; or (b) The person has, within two hours after driving, a THC concentration of 5.00 or higher as shown by analysis of the person's blood made under RCW 46.61.506; or (c) While the person is under the influence of or affected by intoxicating liquor, marijuana, or any drug; or

16 Alaska Deputy Attorney General Rick Svobodny provided input for this section. Mr. Svobodny can be reached at (907) 465‐4044.

17 We identified states without implied consent laws for driving under the influence of a controlled substance from a December 2009 report

from the National Highway Traffic Safety Administration entitled “A State‐by‐State Analysis of Laws Dealing with Driving Under the Influence of

Drugs” (http://druggeddriving.org/pdfs/WalshStatebyStateDrugLawsAnalysis811236.pdf). AS 28.35.031(g) and AS 28.35.035 pertain to implied

consent when a serious motor vehicle accident has occurred.

18 AS 28.35.032.


(d) While the person is under the combined influence of or affected by intoxicating liquor, marijuana, and any drug. (2) The fact that a person charged with a violation of this section is or has been entitled to use a drug under the laws of this state shall not constitute a defense against a charge of violating this section.19

Colorado Revised Statutes § 42‐4‐1301 As is the case in Washington, the impairment level in Colorado is five nanograms of THC per milliliter of blood; however, Colorado's law allows drivers to submit evidence in court to try to prove that they were not impaired even though their THC blood levels were above the legal limit. Whether pulled over for an alcohol or marijuana DUI charge, a Colorado driver can consent to or refuse a blood test; however, refusal to take the test is both admissible in court and a basis for revocation of a driver's license.20 We hope this is helpful. If you have questions or need additional information, please let us know.

19 http://app.leg.wa.gov/rcw/default.aspx?cite=46.61.502

20 Colorado House Bill 13‐1325, which set the set the limit of THC at five nanograms per milliliter, is available at

www.leg.state.co.us/clics/clics2013a/csl.nsf/billcontainers/746F2A0BF687A54987257B5E0076F3CD/$FILE/1325_rer.pdf . Also, a document from the

Colorado Office of Legislative Legal Services summarizing Colorado’s impaired driving laws is available at

http://tornado.state.co.us/gov_dir/leg_dir/olls/PDF/COLORADO%20DRUNK%20DRIVING%20LAWS.pdf.

Alaska Colorado Oregon Washington State

Legalization

VehicleBallot Measure 2 Amendment 64 Measure 91 Initiative 502

Primary

Regulatory

Agency

Alcoholic Beverage Control Board or

Marijuana Control Board, if

established by the legislature.

Department of Revenue, Marijuana

Enforcement Division (MED).Liquor Control Commission (OLCC). Liquor Control Board.

Home

Cultivation

Up to 6 plants, with 3 flowering at

any time.

Up to 6 plants, with 3 flowering at

any time.

Up to 4 plants; limited to 8 ounces of

useable marijuana at any given time.None permitted.

Driving Under

the Influence

No chemical limit specified; typically

a court order is required to compel a

blood sample.

THC content of 5 nanograms per

milliliter of blood.No chemical limit specified.

THC content of 5 nanograms per

milliliter of blood.

Tax Structure

$50 per ounce levied on initial

wholesale transaction plus local sales

taxes, if applicable.

15 percent excise tax on cultivator;

10 percent special sales tax; 2.9

percent standard sales tax; additional

local taxes can be levied.

$35 per ounce, paid by the producer.

25 percent excise tax on sales from

grower to processor, processor to

retailer, and retailer to customer;

plus local sales taxes .

Revenue Use None yet specified.

Marijuana Tax Cash Fund / Marijuana

Cash Fund. Monies used to fund

MED, school construction, expanded

education and prevention efforts,

and law enforcement. Revenue

sharing with local governments that

allow marijuana sales.

40% to Common School Fund;

20% to Mental Health, Alcoholism

and Drug Services;

15% to State Police;

10% to Cities for enforcement of the

measure;

10% to Counties for enforcement of

the measure;

5% to Oregon Health Authority For

Alcohol and Drug Abuse Prevention.

Complicated allocation: first money

goes to fund administrative costs,

various research projects and

prevention or substance abuse

programs; later money is split

between more marijuana‐specific

programs, general healthcare

spending, and the state’s general

fund. No municipal revenue sharing.

Licensing

Regime

Measure contemplates retail

establishments but doesn't delineate

license types. Sets an upper limit of

$5,000 for fees, but allows

adjustment to meet regulatory cost

needs.

Vertical Integration for first 9 months

(retailers had to grow 70 percent of

their product until 10/1/14).

Grower/processor/retailer licensed

by MED. $5,000 application fee plus

licensing costs of $2,200‐$8,000,

depending on type of business.

Renewal fees vary widely $2,500‐

$10,800.

License applications will be accepted

beginning Jan. 4, 2016. Producer,

processor, wholesaler, and retail

licenses offered. Fees are

preliminarily set at $1,000 annually

plus application costs of $250.

Growers, processors, and retailers

must be licensed. No vertical

integration allowed: growers and

processors cannot be retailers,

though joint grower‐processor

licensed issued. Retail licenses

capped at 334 for the state. Fees

vary by type from $3,000‐$6,500.

Table 1: Selected Provisions of Successful Recreational Marijuana Legalization Initiatives

___________________________________________________________________________________________________________________________________

Legislative Research Services Report 15.099, November 2014 Page 1 of 2

Alaska Colorado Oregon Washington State

Diversion

Prevention

No provisions in measure. May be

addressed through development of

regulations.

Seed to Sale Tracking System; limits

on quantities purchased /possessed;

education campaigns; video

surveillance requirements.

No provisions in measure. May be

addressed through regulation.

Marijuana import / export for

distribution is a Class C felony.

Same measures as Colorado. Tight

control over licensing and deliberate

roll‐out to enhance prevention of

interstate diversion.

Local Control

Municipalities may prohibit

marijuana cultivation, processing,

and sales by ordinance or voter

initiative. Can govern the time,

place, number, and manner of

marijuana establishments and their

operations. If the state fails to

establish a licensing regime within 12

months, municipalities may

implement the Act.

Counties, municipalities can opt out.

Local governments can regulate the

number of grow operations and

dispensaries. Local governments can

assess additional taxes. Local

governments can issue zoning and

other ordinances regulating

production and consumption.

The measure preempts local

ordinances. Municipal governments

may not prohibit licenses except via

general election. Measure 91 allows

local governments to adopt time,

place and manner restrictions to

regulate public nuisance.

Preempts local drug laws, but some

localities seeking to use zoning laws

to effectively exclude stores were

encouraged by non‐binding state

Attorney General opinion. Litigation

is pending.

Selected

Regulatory

Features

Monthly cultivation and sales reports

required to include identity of

wholesale buyers.

Extensive criminal background checks

for all licensees; scaling up of product

and potency testing.

Product standards and testing to be

developed through regulation.

Labeling requirements imposed.

Extensive criminal background checks

of all licensees; broad product safety

testing.

Official Analyses

Required or

Produced

None.

State commissioned a survey of

market demand. Separate revenue

analyses/projections conducted by

the Department of Revenue,

Governor’s Office of State Planning

and Budgeting, and the Colorado

Legislative Council.

OLCC required to compile research

on marijuana DUI and report to

legislature by January 2017.

Initiative mandates cost‐benefit

analysis conducted by Washington

State Institute for Public Policy

(WSIPP), with preliminary report in

2015 and subsequent reports in

2017, 2022, and 2032.

Table 1: Selected Provisions of Successful Recreational Marijuana Legalization Initiatives (continued)

Notes: This table is not exhaustive of all of the legal provisions within the recreational marijuana initiatives in these four states.

Source: Websites of regulatory agencies; the Brookings Institution, http://www.brookings.edu/blogs/fixgov/posts/2014/07/08‐washington‐colorado‐legal‐marijuana‐comparison‐wallach‐

hudak ; and text of ballot measures: Alaska‐http://www.elections.alaska.gov/petitions/13PSUM/13PSUM‐Proposed‐Law.pdf; Colorado‐ http://www.fcgov.com/mmj/pdf/amendment64.pdf;

Oregon‐http://www.oregon.gov/olcc/marijuana/Documents/Measure91.pdf; Washington‐http://sos.wa.gov/_assets/elections/initiatives/i502.pdf.

___________________________________________________________________________________________________________________________________

Legislative Research Services Report 15.099, November 2014 Page 2 of 2

Attachment A

“Estimates of Costs to the State of Alaska for the Implementation of the Initiative Proposing an

Act to ‘Tax and Regulate the Production Sale, and Use of Marijana,’” Report to the Alaska

Alcoholic Beverage Control Board, February 2014

Estimate of Costs to the State of Alaska for the Implementation of the Initiative Proposing an Act to "tax and regulate the production, sale, and use of marijuana."

Summary

As required by AS 15.45.090(a)(4), the State of Alaska has prepared the following statement of costs resulting from the implementation of the proposed ballot initiative to tax and regulate the production, sale, and use of marijuana.

The initiative would legalize the personal use of marijuana for persons age 21 or older. Specifically, the statute would permit: the possession, use, display, purchase, or transportation of marijuana accessories or one ounce or less of marijuana; the possession, growth, processing, or transporting of no more than six marijuana plants (with three or fewer being mature, flowering plants) and possession of the marijuana on the premises where the plants were grown; the transfer of one ounce or less of marijuana and up to six immature marijuana plants to a person who is 21 years of age or older without remuneration; the consumption of marijuana in a non-public location; and assisting another person who is 21 years of age or older in any of the above activities.

The initiative would also impose certain restrictions and penalties on the personal cultivation and public consumption of marijuana as well as prohibit the use of false identification by a person under the age of 21 to purchase or attempt to purchase marijuana. It would allow for the manufacture, possession, purchase, distribution and sale of marijuana accessories as well as the lawful operation of marijuana- related facilities such as retail stores and cultivation facilities.

The initiative requires the Alcoholic Beverage Control Board (ABC) in the Department of Commerce, Community and Economic Development (DCCED) to adopt regulations to implement the law no later than nine months after the initiative is approved. However the legislature may create a Marijuana Control Board in DCCED to assume the ABC's regulatory role. Marijuana establishments must be registered and local governments could prohibit or limit the existence of and operations of marijuana facilities in their jurisdiction.

The initiative also imposes a $50 per ounce (or proportionate part) excise tax on the sale and transfer of marijuana from a marijuana cultivation facility to a retail marijuana store or marijuana product manufacturing facility. The tax would be paid by the marijuana cultivation facility.

Based on examination of Washington and Colorado, two states that are currently in the process of implementing similar legislation, the Governor, the Legislature, or the ABC Board may choose to establish a Task Force to represent the major stakeholders affected by the implementation of the initiative. An estimate of the potential costs for the Task Force is included under the DCCED cost statement beginning on page 3. This would be an effective method to facilitate an expedient and comprehensive gear up of the tax and regulatory framework described or established in the initiative.

There are numerous unknowns in the state's implementation of this initiative and as such the cost statement provided here is illustrative. For example, it is unknown whether or not the legislature will create a Marijuana Control Board within DCCED, so the cost estimates do not reflect that potential administrative structure. Using information available from the Colorado and Washington experiences as well as other sources, state agencies have identified a range of potential costs to the state from $3. 7 to $7 .0 million in the first year. It is likely that costs related to development of the

1

tax and regulatory framework would initially be significant. Over the longer term, it would be expected that more of the state's total costs would become public health and education activities as the extent of the impact on public health becomes more defined.

Below is a summary table of agency costs followed by explanations of the estimates by individual agency. The following represents a potential range of state agency costs. The estimate does not include expenses that the legislature may or may not incur associated with the initiative, or any legal expenses that the state may incur as a result of the initiative.

Summary of estimated costs to implement the Marijuana Initiative by State Agency

Agency

Alaska Department of Revenue

Alaska Department of Commerce, Community and Economic Development

Alaska Department of Health and Social Services

Alaska Department of Public Safety

Alaska Department of Environmental Conservation

University of Alaska

Office of the lieutenant Governor

Division of Elections

Total First Year Estimated Cost

Statement of Cost Estimates by Department

Estimate of costs to the Alaska Department of Revenue to implement the marijuana initiative

Cost Range - First Year

$650,000 $800,000

$1,563,960 $1,563,960

$0 $2,987,000

$1,434,700 $1,434,700

$0 $136,900

indeterminate -$9,000 $9,000

$71,257 $71 ,257

$3,728,917 $7,002,817

$650,000 -$800,000

If this initiative is approved by the voters in the August 2014 primary election, it would require DOR to incur additional costs to effectively implement it. If approved, it is presumed that this initiative would take effect thirty days after approval by a majority of qualified voters.

The estimated cost to the state for the implementation of this initiative is between $650,000 and $800,000. Recurring annual costs are estimated at approximately $300,000.

The estimated costs can be broken down into two categories:

Personnel Services: Contractual Services: TOTAL

$300,000 $350.000-$500.000 $650,000-$800,000

Personnel - DOR estimates that it will need to create at least three new positions to oversee the new excise tax imposed by this initiative at a cost of approximately $300,000 to assist with the administration and collection of a new excise tax. DOR would need at least one Tax Auditor III

2

position, one Tax Technician II position, and one Investigator III position to fulfill the needs of a new tax program. This cost is similar to the cost that is currently incurred by DOR to administer other similar types of excise taxes, and would be recurring annual costs for DOR.

Contractual Services - DOR estimates that it will incur a one-time additional expense of approximately $500,000 for systems configuration. In August 2014, DOR will be complete with configuring the excise tax portion of its new Tax Revenue Management System (fRMS). If this initiative is approved by the voters, it will require DOR and its information system contractors to reconfigure the system to add this new excise tax. Given the limited timeframe to analyze what portions of the system would need to be reconfigured if the initiative passed, DOR's contractors have supplied an estimate of $350,000 to $500,000 for this effort.

The above cost estimates represent a minimum cost given the numerous uncertainties around the referendum, and what all of the effects of its passage would be.

Estimate of costs to the Alaska Department of Commerce, Community and Economic Development to implement the marijuana initiative $~563,960

The following represents an estimated cost to DCCED given the language of the ballot initiative; the actual costs will likely be different. The estimate does not include expenses the legislature or other departments may incur associated with the initiative. The Washington and Colorado marijuana initiative cost estimates were reviewed in developing this cost analysis.

If the initiative is approved by voters in the August 2014 primary election, the State of Alaska, through the Alcoholic Beverage Control (ABC) Board, shall adopt regulations within nine months following the effective date, as required by AS 17.38.090. It is presumed that the initiative would take effect thirty days after the approval by a majority of qualified voters.

A local government may designate a local regulatory authority that would be responsible for processing applications submitted for the operation of a marijuana establishment within the boundaries of the local government. If the ABC Board fails to adopt regulations as outlined in the initiative, an applicant may submit an application directly to a local regulatory authority one year after the effective date of the law. In accord with AS 17 .38.110, a local government may prohibit cultivating, manufacturing, testing, and selling marijuana through an ordinance or voter initiative. Local governments may also enact local ordinances or regulations for the governance of marijuana establishment operations as long as they are not in conflict with the initiative or regulations enacted pursuant to the initiative.

If the initiative passes, the responsibility for controlling marijuana will lie with the ABC Board until or unless a marijuana control board is established by the legislature within DCCED.

As was done in the state of Colorado following the passage of a similar initiative, the department recommends the creation of a Task Force to identify legal, policy, and procedural issues that need to be resolved, and to offer suggestions and proposals for legislative and executive action for the implementation of this initiative. The Task Force would need to complete its initial regulatory framework within four months of the effective date of the initiative to allow for the adoption of

3

regulations within the nine month requirement. The remaining Task Force work would be concluded one year after the effective date of the initiative.

It is assumed that the Task Force would be comprised of a total of 17 uncompensated members representing interest groups affected by the ballot initiative: four Legislators, one each from the majority and minority of both the House and Senate; one Commissioner or their Designee from each agency affected by this initiative (DCCED, Public Safety, Health and Social Services, Environmental Conservation, Revenue, Law, Corrections and the University of Alaska); one member of the initiative campaign; one member of the public who represents the medical industry; and three members of the public at-large, with one representing rural Alaska. Task Force members will receive travel and per diem. The actual composition of the Task Force may be different. The estimated total cost to DCCED for the implementation of this initiative is $1,563,960 for the first year and $1,413,140 for the second year.

Business Registration Examiners, Range 13 C - 2 at $73,000 each

Investigator Ills, Range 18 C - 4 at $99,300 each

Investigator IV, Range 20 C

Administrative Officer I, Range 17 C

Program Coordinator II, Range 20 C

Total Personal Service Costs

Board member/Staff travel and per diem

Informants/underage buyers (compliance check) travel, pay, and per diem

Task Force travel and per diem

Total Travel and Per Diem Costs

ABC Board Warning/Enforcement Signs

Envelopes

Forms

Postage

Office Space 160 sq. ft. per employee at $3 foot

Ongoing support services for new employees

One-time set up costs for new positions

Total Equipment, Office Space, and Supplies Costs

Task Force recommendations contract funds

Department of Law Assistant Attorney General Services

Department of Law for expedited regulations

Database Creation

Database Maintenance

Vehicles 4 at $33,500

4

First Year

$107,800

$107,800

$16,600

$16,600

$2,000

$800

$1,500

$2,000

$5,760

$10,000

$5,000

$27,060

$650,000

$62,500

$200,000

$500,000

Second Year

$146,000

$397,200

$110,000

$86,000

$107,800

$847,000

$85,900

$34,000

$119,900

$2,000

$800

$1,500

$2,000

$51,840

$90,000

$40,000

$188,140

$62,500

$50,000

$134,000

Vehicle Operating and Maintenance at $240 per month $11 ,600

Total Contracts and Services Costs $1,412,500 $258,100

Total Costs $1,563,960 $1,413,140

Personal Services

All positions within the ABC Board are currently performing at or above capacity. With the passage of the initiative, the workload of the ABC Board has the potential to double or triple. If doubled, the ABC Board would require an additional four investigators, one supervisor, and two business registration examiners to regulate the marijuana industry, similar to the duties of current staff that regulate the liquor industry. The addition of an Administrative Officer I would be necessary to support the added financial requirements. A Program Coordinator II would be necessary for the facilitation, coordination, and documentation of the Task Force and for the long-term program development, planning, coordination, and oversight of this complex program.

Travel and Per Diem

Board If the ABC Board of Directors takes on the added responsibility of controlling the cultivation, manufacture, barter, possession, and the sale of marijuana, the current board meetings would be extended by one day, adding to the cost of lodging, ground transportation, and per diem.

Investigations Investigators and underage buyers will travel to communities around the state to provide compliance checks and ensure retailers adhere to the laws and regulations of the program, similar to liquor industry compliance investigations.

Task Force The Task Force will hold seven two-day meetings, with two face-to-face meetings in Anchorage and the rest conducted either by video or teleconference; this assumes ten members are located outside Anchorage.

Equipment, Office Space, and Supplies

Equipment and supply costs includes new employee set up, warning signs, test kits, paper products, postage, and additional office space.

Contracts and Services

Contract costs are for studies on market demand, effects of marijuana, and the cost of production. Regulations will need to be in place nine months after the effective date of this initiative and will require extensive work with the Department of Law. There will be significant ongoing work required by the Department of Law to meet the demands of this new program, similar to the legal demands of the liquor industry.

5

A new database would require the analysis and development of business rules, analysis of existing systems for parallel processes or required modifications, new system development, testing, validation, implementation, and documentation.

Vehicles

Additional vehicles are required to perform investigations across the state.

Estimate of costs to the Alaska Department of Health & Social Services to implement the marijuana initiative $0 - $2,987,000

As written, the initiative primarily focuses on the process and procedures necessary to establish

taxation and regulation of the production, sale and use of marijuana; the actions addressed in the

initiative will not directly impact or cost the Department of Health and Social Services in the

establishment of these procedures and regulation development.

However, there is evidence that downstream health and social service consequences of

implementing this initiative could be significant. The department has prepared an estimate based on

research, other states' experiences, and an extrapolation of expenses the department incurs

providing similar substance related services. The fiscal impact will directly relate to how many

additional people begin using marijuana and how many current users increase their use.

To evaluate costs, the department has considered recent studies including Proceedings of the

National Academy of Science1, and the United Nations Office on Drugs and Crime, Cannabis: A

Short Review. 2

These studies note emerging findings on the harmful effect of cannabis on neuropsychological

functioning data indicating cannabis is linked to addiction, cognitive impairment, motor skills

deficiency, respiratory, cardiovascular and mental health problems, and has been shown to be

particularly damaging to maturing brains.

The consequences and outcomes of marijuana use create a significant potential for increased costs

for physical and behavioral health care, child welfare services, educational systems, employers, public

safety, criminal justice, community health and other aspects of state and local governments. For

instance, legalization of marijuana may create an environment in which young people, in particular,

perceive a lower risk of harm from marijuana use, resulting in increased use3•

According to Robert Morrison, Executive Director of the National Association of State Alcohol and

Drug Abuse Directors (NASADA), Alaska has one of the highest use rates of marijuana at 11 %,

1 Persistent cannabis users show neuropsychological decline from childhood to midlife. Meier, Madeline H., Caspi, Avshalom, et al. Proceedings of the National Academy of Science. Published online August 27, 2012 2 Cannabis: A Short Review, Discussion Paper from the United Nations Office on Drugs and Crime. 2012. 3 Trends in Adolescent Substance Use and Perception of Risk from Substance Use. The NSDUH Report; from the Substance Abuse and Mental Health Services Administration (SAMHSA) and the National Survey on Drug Use and Health. January 3, 2013.

6

along with Vermont. He also highlights that an estimated 4.4 million individuals, nationwide, met

criteria for marijuana dependence or abuse. 4

While actual increases in health and social service programming are unknown, research and data

provide a clear picture of the potential for increased problems associated with the legalization of

marijuana. In states where medical marijuana is legal, marijuana abuse and dependence rates are

almost twice as high as in those states without medical marijuana.5 Two states that have recently

legalized marijuana, Washington and Colorado, report difficulty determining the potential costs.

Results of a recent report to estimate the fiscal impact of marijuana legalization in Colorado were

inconclusive and four national marijuana-policy experts wrote that "the future holds more

unknowns than knowns."

The Division of Juvenile Justice has identified several areas in which costs could increase. Making

possession of marijuana an offense that can be committed by minors but not adults creates a new

status offense that is subject to specific rules governing the secure holding of juveniles. Violation of

those rules could jeopardize federal funding currently received through the U.S. Office of Juvenile

Justice and Delinquency Prevention. The initiative could also require increased treatment for

substance abuse and mental health issues among youth held in detention.

With this very brief overview of concerns about increased marijuana use and legalization, the

department anticipates potential costs to DHSS in the following areas, with estimates of per annual

cost increases:

./ Increased substance use, dependency and addictions treatment $200.000 or a 10% increase

in treatment services for marijuana dependence;

./ Increased mental health treatment services $1.1 million or a 5% increase in mental health

treatment services;

./ Increased physical health services through public health and our primary care providers

$400.000;

./ Increased Medicaid costs to cover treatment and service needs $27 .000 or a 10% increase in

current marijuana treatment services covered by Medicaid

./ Increased enforcement of marijuana access by youth (similar to our current tobacco

enforcement efforts). This expenditure will be determined upon the process developed for

retail sale of marijuana $140.000 or a potential 20% increase

./ Increased prevention, education and early intervention programs for adolescents and young

adults 10% community grant increase and 20% ASAP service increase = $390.000 + $250.000;

4 Marijuana Regulation: Considerations from State Substance Abuse Agency Directors. A presentation to the National Conference of State Legislatures (NCSL), Spring Forum. Robert Morrison, Executive Direction, NASADAD. May 3, 2013. 5 Toolkit for States Facing "Medical" Marijuana & Marijuana Legalization Initiatives. Community Anti-Drug Coalitions of America (CADCA). Summer 2012.

7

,/ Increased child protection services for young children in homes with regular and persistent

marijuana users (second hand marijuana smoke, neglect) training for foster parents and staff

$250.000;

./ Increased juvenile justice services for youth engaged in marijuana use and dependency

$200.000;

,/ Potential Human Resource activities related to employee use of marijuana and related

policies $30.000.

Estimated annual potential cost increases to the Department of Health and Social Services resulting

from the legalization of marijuana are $2,987,000. As indicated, these are estimates based on

projected impacts depending on the actual regulations, enforcement and number of citizens who

increase their use of marijuana, actual costs are likely to be different.

Estimate of Costs to the Alaska Department of Public Safety to implementation the marijuana initiative $1,434,700

The ballot initiative would tax and regulate marijuana sales and allow Alaskans to cultivate marijuana for personal use. Persons 21 years of age or older could legally possess up to one ounce of marijuana or six marijuana plants (three of which could be mature), and could legally cultivate, sell and purchase marijuana through authorized marijuana-related facilities.

The cost to DPS to implement the law proposed by this initiative is based on the following assumptions regarding the legalization of marijuana in Alaska; it will lead to increased demand and usage and a consequent increase in the number of people driving while under the influence of this drug; and, it will increase the illegal diversion and exportation of marijuana lawfully cultivated in Alaska.

Therefore, the costs to DPS are associated with the following:

1. Increasing the number Statewide Drug Enforcement Unit trooper investigators to target the diversion and exportation of marijuana lawfully grown in Alaska;

2. Requiring more troopers to receive Drug Recognition Expert (DRE) certification to enhance their ability to detect drivers impaired by marijuana and address the anticipated increase in DUI offenses;

3. Launching a public education and awareness campaign on the dangers of driving under the influence of marijuana; and

4. Increasing the number of samples being sent out for toxicology analysis to detect the presence of marijuana in blood.

Division of Alaska State Troopers:

Marijuana is identified as a primary substance of abuse in Alaska, along with alcohol, cocaine, heroin, and prescription drugs. These substances are the focus of most drug enforcement efforts in Alaska.

8

DPS' Division of Alaska State Troopers (ASl), Alaska Bureau of Investigation, Statewide Drug Enforcement Unit (SDEU) provides a leadership role in coordinating law enforcement's efforts to reduce the availability of illegal alcohol and controlled substances (including marijuana) throughout Alaska. The SDEU primarily supports six investigative drug task forces throughout Alaska. These teams are broken down by region as follows:

- Alaska Interdiction Task Force/ Anchorage Enforcement Group (sponsored by the U.S. Drug Enforcement Administration)

- Fairbanks Area-wide Narcotics Team

- Mat-Su Narcotics Enforcement Team

- South Central Area-wide Narcotics Team

- Southeast Alaska Cities Against Drugs Task Force

- Western Alaska Alcohol and Narcotics Team

SDEU participates with and receives assistance from several federal investigative agencies involved in drug enforcement. These agencies include the: Drug Enforcement Administration (DEA); Federal Bureau of Investigation (FBI); U.S. Postal Inspection Service; Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE), and US Immigration and Customs Enforcement (ICE).

The DEA awarded $80,000 in Marijuana Eradication grant funds to the State of Alaska in calendar year 2012. These funds were used to cover some of the costs associated with marijuana eradication in the state. In calendar year 2012, funds were shared with the Anchorage, Craig, and Kenai police departments to cover overtime incurred by officers involved in eradication operations. The following table reports the activities supported through this grant:

2012 Duml·stic C11111.1his Er.1dil'.1tiu11/S11ppn·ssio11 St.ttistil·.d Hq)ot I for Al.i...k,1 Total Total Total

Eradicated Total Eradicated Total Cultivated Outdoor Cultivated Indoor Cultivated Plants Bulk Number *Assets

Grow Plants Grow Plants (Outdoor Processes of Seized Weapon Sites Outdoor Sites Indoor & Indoor) Marijuana Attest (Value) Seizure

3 113 62 4,270 4,383 203 76 $36,077 *Assets seiz.ed include paraphernalia items such as grow lights and digital scaks and does not include manjuana plants.

Given that marijuana is illegal under federal law, legalization of marijuana in Alaska will have an impact on the collaborative working relationships DPS has with its federal counterparts and could potentially affect federal grant funds DPS and local law enforcement agencies receive for marijuana eradication and suppression efforts.

Should this initiative become law, it is practical to assume that arrests for simple possession will decrease. Even so, drug enforcement efforts are primarily targeted at individuals engaged in commercially cultivating and trafficking marijuana.

9

74

It will likely not be the case that sales of marijuana would be conducted only by legitimate, taxpaying business people and not criminal actors. Demand for Alaskan-grown marijuana is high due to its exceptional tetrahydrocannabinol (THC) content. Because Alaskan-produced marijuana may be considered high quality, there is potential that Alaska would become a marijuana exporting state. AST predicts illegal commercial marijuana growing operations will continue to exist to meet this demand, skirting taxes and regulation in order to make the maximum profit. In addition, allowing the operation of marijuana cultivation facilities as proposed by the initiative actually increases the opportunity for Alaska's "legally grown" marijuana to be illegally diverted and exported.

DPS would require at least three additional Alaska State Trooper positions to target the illegal diversion and exportation of marijuana lawfully cultivated in Alaska. These positions would also work with DCCED's Alcoholic Beverage Control (ABC) board investigators on investigations into criminal activity associated with regulation of the marijuana industry.

The first year cost of three new trooper investigator positions is $827,200; $594,4-00 for ongoing funding to cover personal services, travel, training, and supplies (base increment), and $232,800 to cover training at the academy, IT equipment, portable radios, office equipment, firearms and vehicles (one-time funding).

Though arrests for simple possession may decrease, the greater availability of marijuana will likely increase the number of adults consuming marijuana and the frequency with which it is consumed; consequently, the number of individuals driving under the influence of marijuana is expected to increase. Current practice is to administer standardized field sobriety tests to individuals suspected of driving under the influence (DUI). There is currently no chemical test that can be used in the field to detect marijuana impairment; the taking of a blood sample for purposes of determining the presence of a controlled substance (including marijuana) must be conducted at a medical facility.

To quickly and proficiently recognize the signs of marijuana impairment in drivers who are contacted, DPS proposes that more troopers become certified as drug recognition experts. A drug recognition expert (DRE), sometimes referred to as a drug recognition evaluator, is a police officer trained to recognize impairment in drivers under the influence of drugs other than, or in addition to, alcohol. Training and certification requirements are established by the International Association of Chiefs of Police and the National Highway Traffic Safety Administration. The cost for this training is approximately $2,500 per trooper.

Finally, DPS would launch a major public education and awareness media campaign focused on the dangers of driving under the influence of marijuana, similar to its current drunk driving and seat belt use campaigns. Using current media campaign expenditures as a base, the production and advertising costs for a DUI campaign focused on marijuana impairment are estimated to be $500,000 per year for television, radio, print, and internet advertising.

Scientific Crime Detection Laboratory:

The DPS Scientific Crime Detection Laboratory (SCDL) provides drug identification services to Alaska's law enforcement agencies through its controlled substances section. Forensic scientists in the section analyze evidence items and conclusively identify a controlled substance or perform sufficient analysis to determine that no controlled substances are present.

10

Drug evidence submitted to the section can be analyzed through a variety of methods that include preliminary testing combined with confirmatory testing. Preliminary testing can include color testing, microcrystalline microscopic analysis, or physical identification of a tablet using a reliable source. The confirmation of the presence of a controlled substance is performed through one of two confirmatory tests, gas chromatography/mass spectrometry (GC/MS) or infrared spectrophotometry.

Following analysis, a forensic scientist interprets the instrumental data and prepares a report of his/her findings. This report is used in criminal court proceedings and often the forensic scientist is asked to provide expert testimony to the courts.

Marijuana, a schedule VIA controlled substance under AS 11. 71.190, is commonly submitted by law enforcement agencies to the crime lab. Drug paraphernalia such as pipes and digital scales are also frequently submitted to the crime lab for analysis. Forensic scientists may also be called upon to analyze samples for federal agencies operating within Alaska for substances controlled under the federal Controlled Substances Act, which includes marijuana.

The crime lab seldom analyzes personal use quantities of marijuana. Rather, the evidence being submitted to the crime lab is indicative of distribution (trafficking) level quantities. As AST predicts that illegal commercial marijuana grow operations will continue despite any legalization of marijuana-related facilities, such as marijuana cultivation facilities and marijuana retail stores, the SCDL does not anticipate a decrease in submissions of evidence.

Alaska does not currently have an in-house drug toxicology program. The SCDL has a contract with the Washington State Patrol Toxicology Laboratory in Seattle for toxicology services and sends samples there for drug analysis. Based on the anticipated increase in marijuana impaired driving, DPS estimates that an average of 150 additional samples will be sent out for analysis each year. At an average cost of $300 per sample, the increase in contract costs would be $45,000 per year.

The estimated total cost to DPS for the implementation of this initiative is $1,434,700 for the first year and $1,201,900 for the second year. Following is a summary of the estimated costs:

Three Trooper Investigator Positions One-time position costs (academy training, IT equipment, office equipment, firearms, and vehicles)

Total Personal Service Costs

Marijuana DUI Media Campaign (production and advertising)

DRE Certification ($2.5/trooper x 25 troopers annually) Contractual increase for toxicology services ($300 /sample x 150 additional samples)

Total Contracts and Services Costs

TOTAL COSTS

11

First Year Second Year

$594,400 $594,400

$232,800 $0.0

$827,200 $594,400

$500,000 $500,000

$62,500 $62,500

$45,000 $45,000

$607,500 $607,500

$1,434,700 $1,201,900

Estimate of costs to the Alaska Department of Environmental Conservation to implement the marijuana initiative $0 - $136,900

The ballot initiative, legalizes marijuana for use by persons 21 years of age and older. Section

17.38.080 states that the Department of Commerce, Community, and Economic Development

(DCCED) may create a Marijuana Control Board; otherwise, the powers, duties, and responsibilities

fall to the Alcoholic Beverage Control Board, located in the DCCED.

Normally, under AS 17.20, the DEC has responsibility to regulate food and food products. So, marijuana or its derivatives, if considered a food, would fall under those provisions. However, under

17 .38.090 of the proposed law, responsibility for regulating marijuana, including creating labeling requirements and health and safety regulations for the manufacture of marijuana, lies with the

Alcoholic Beverage Control Board.

If additional food establishments were opened to create marijuana products (such as marijuana

bakeries, etc.) along with additional food facilities opening up in the state, the Food Safety and

Sanitation Program within DEC will need an additional Environmental Health Officer III position

in Anchorage to review sanitation plans and conduct sanitation inspections for the increased number

of facilities. If there is an increase in facilities, DEC anticipates needing one full time position at a total cost of $136,900 (includes personal services, travel, contractual and supply expenses).

The estimates are done based on the cost during FY14 and do not reflect inflationary increases that

will occur during the years it takes for this legislation to be passed, regulations to be written, and individuals to set up grow operations and potential food establishments. The cost will likely increase

in future years.

Estimate of costs to the University of Alaska to implement the marijuana initiative Indeterminate

The University of Alaska has examined the initiative and due to the uncertainty around the initiative cannot provide a definitive estimate of the costs that it would incur at this time, however, should the initiative become law, it will directly impact the university's primary population - its students.

Areas of potential costs include but are not limited to:

As with Colorado and Washington, education will be needed for students, faculty, and staff about how the initiative would change university policies regarding possession or use of drugs on campus.

The Clery Act includes requirements for education on drug effects. The University would need to adjust its Clery documents, and there would potentially be some production costs associated with that effort. Additionally, there will likely be costs associated with revising university policies and regulations such as housing, employment and discipline.

It is anticipated that there would be additional costs associated with enforcement (the proposed law prohibits consumption in public) by UAA and UAP police departments as well as by administrators

12

There are potential legal costs associated with analyzing initiative and advising Major Administrative Units. (MAU's)

There is likely to be some impact on the health care costs and rates for employees as well as a potential impact on insurance rates for the University.

The University envisions that they would very likely incur some research costs based on requests for information on the social and economic impacts of the initiative.

Estimate of costs to the Office of the Lieutenant Govemor and the Division of Elections to implement the marijuana initiative

Office of the Lieutenant Govemor

$80,257

Assuming the initiative is placed on the ballot, the minimum cost to conduct public hearings

concerning the initiative in two communities in each of four judicial districts is estimated to be

$9,000. This number may be reduced if hearings are held on more than one initiative at a time.

Lt. Governor's Office estimate by category

Travel Total

$ 9.000 $ 9,000

Estimated travel expenses include round-trip air transportation, per diem and other associated travel costs for the Lieutenant Governor and staff to travel to seven communities in Alaska. It is assumed

one of the hearings would be in Anchorage which would not involve travel costs.

Division of Elections

The minimum cost to the Division of Elections associated with certification of the initiative

application and review of the initiative petition, excluding legal costs to the state and the costs to the

state of any challenge to the validity of the petition, is estimated to be $71,257.

Elections estimate by category

Personal Services

Services

Total

$69,957 $1.300

$71,257

Personal services expenses associated with certification of the initiative application and review of the

initiative petition: Three full-time employees at 522 hours is $29,200

8 temporary employees at 2,520 hours is $40,757

Services expenses associated with certification of the initiative application and review of the initiative petition:

Printing of booklets is $1,300.

13

Attachment B

Miles K. Light, Adam Orens, Brian Lewandowski, and Todd Pickton, “Market Size and Demand

for Marijuana in Alaska,” Marijuana Policy Project Group, October 2014

MARKET SIZEAND DEMANDFOR MARIJUANAIN ALASKA

Prepared by:

The Marijuana Policy Groupwww.mjpolicygroup.com

Prepared for:The Voters of Alaska

October 27, 2014

Authors:Miles K. Light, Adam Orens, Brian Lewandowski, and Todd Pickton

The Marijuana Policy Group (MPG) was formed in 2014 as a collaborative effort betweenColorado university researchers and BBC Research & Consulting in Denver. Both entities haveoffered custom economic, market, financial and policy research and consulting services for over40 years. The MPG mission is to apply research methods rooted in economic theory andstatistical applications to inform regulatory policy decisions in the rapidly growing legal medicaland recreational marijuana markets.

1 [email protected] [email protected]

Executive Summary

This report is supplied by Colorado’s Marijuana Policy Group (“MPG”), a consortium of Universityresearchers and economic consultants specializing in marijuana market design and policy. The MPGprovides market analysis for the Colorado Marijuana Enforcement Division, the state regulatoryagency that controls and monitors the Colorado market for legal marijuana production, distributionand sales.

The report was compiled because no official assessment has been developed to help Alaska votersunderstand potential sales and tax revenues under a legal marijuana regime. The MPG was not paidto conduct this study. The Marijuana Policy Group does not support or oppose the Alaska BallotMeasure 2 for 2014.

The MPG estimates that aggregate demand for marijuana in Alaska equals 17.8 metric tons. Thisrepresents total demand for marijuana by adults over the age of 21 years, and only Alaska residents.Tourist demand has not been included. Alaskan marijuana demand is currently supplied through avariety of channels: medical caregiver networks; the black market; the “grey market”, where excesscaregiver supply is sold to non-patients; home-grow activities; and direct imports from Canada andthe lower 48 states.

If a legal retail market is approved, the MPG estimates that 22.4% of total demand, -- an amount of4.0 metric tons -- would be supplied through legal retail stores during the first year. The state-widevalue of first-year sales would be $55.6 million, assuming the pre-tax retail price is similar toColorado during their first year ($14 per gram).

If the State of Alaska levies a $50 per ounce unit tax upon the sale of marijuana as specified in theballot measure, total tax revenues would equal $7.1 million during the first year of sales.

The MPG projects total sales in Alaska over a five-year time horizon. Retail prices are expected todecline as competition and volume increase, and sales margins decline. If retail prices decline overtime, then a much larger share of users will shift into the retail market. For example, if the retailprice declines from $14 per gram to $8 per gram between 2016 and 2020, then the retail marketpenetration rate would increase from 22.4% of state demand in the first year, to 75.3% of statedemand in 2020.

A higher rate of sales migration from the black market into the legal market would increase taxrevenues. The following table shows expected sales values and tax revenues between 2016-2020:

Table 1. Expected Sales Values and Tax Revenues, 2016-2020

Note: Units in 2014 dollars.

Source. MPG calculation as described in report.

YearPrice per Gram

Retail Sales Value ($) $55,565,228 $64,835,925 $79,908,625 $91,270,074 $106,916,870Tax Revenues ($) $7,064,722 $9,617,329 $14,223,735 $18,051,192 $23,789,003

2020$8

2019201820172016$14 $12 $10 $9

Overview

Ballot measure 2 in Alaska asks residents to decide whether or not to legalize marijuana use forrecreational purposes. Due to Alaskan legislative policy, the state government is not allowed to fundstudies related to the fiscal effects that may be caused by approval of Ballot Measure #2.

The Marijuana Policy Group (MPG), a consortium of academics and consultants from Colorado, decidedthat a preliminary estimate of state demand for marijuana, and the estimated marijuana tax yield,would help focus the debate more accurately upon the benefits and costs associated with passage of theMeasure. The figures included herein provide demand and tax estimates for the period between 2016and 2020. In practice, the measure may not be enacted until a later date if approved. The analysis allowsvoters to get a sense of potential tax revenue if the legal market if the legislation is enacted one yearfollowing voter approval.

To estimate state potential tax revenues accurately, the MPG first conducted an estimate of total statedemand for marijuana products using the most recent state-level National Survey on Drug Use andHealth (NSDUH) usage and prevalence data (2010-2011) by the Substance Abuse and Mental HealthServices Administration (SAMHSA).1 The procedures used for Alaska follow similar steps as those usedby the MPG to estimate Colorado state demand, while working for the Colorado Department ofRevenue-Marijuana Enforcement Division (the MED).2

In order to estimate Alaska state demand for retail-based marijuana products, it must be noted that onlya portion of total state demand will be purchased from legalized retail outlets. There are severalreasons why consumers would choose not to purchase from legal retail outlets, especially during theearly phases of legalization. Price is the most significant deterrent, but other factors include: distance(or effort) to a legal outlet, relative quality of retail supplies compared to illegal supplies, and relativesupply from licensed medical marijuana caregivers and collectives.

The MPG has applied conversion factors that are similar to what was experienced in Colorado, duringthe first year of legalization, in order to estimate the first-year conversion factor. A proprietary MPGdemand model is also used to estimate first year conversion to the retail market, as well as a five-yearestimate for conversion and demand. Over time, the relative price for retail marijuana is expected todecline compared to illegal marijuana. This will lead to higher conversion rates over time. The MPGdemand model also incorporates individual user type demand structures, which increases the accuracyof the conversion factors.

Summary results are provided in Table 2 on the following page.

Table 2: Marijuana Demand, Sales, and Tax Revenue Estimates, 2016

Note: 1. Retail demand assumes a flat, 22.4% conversion factor from total demand in 2016.2. Retail sales values assume an average price of $14.00 per gram, or $392 per ounce (@28 grams).3. Tax revenues assume a flat, unit-based tax of $50 per ounce sold.

Source: Marijuana Policy Group.

We estimate that 17.8 metric tons of marijuana flower3 will be demanded by Alaska state residents in2016. Of this, 4.0 metric tons would be purchased through recreational retail outlets, if Ballot Measure2 were approved. State tax revenues, if applied as described in the Measure 2 ($50 per ounce unit tax),would be equal to $7.1 million dollars in the first year. Revenues may be as low as $5.6 million, or ashigh as $8.6 million. These figures are substantially lower than other estimates obtained from anadvocacy group4 because conversion factors were not considered in their analysis.

Tax revenues will increase after the first year, if they are taxed on a unit basis, as more users convert tobuying from retail outlets. If the tax were applied using an ad-valorem basis, then the revenues woulddepend upon the combination of sales volumes, and the price. As time passes, the volume is expectedto increase, because the retail price is expected to decline. The net revenue yield would depend uponthe relative price and volume changes, respectively. MPG provides five-year projections of marijuanademand, sales and state tax revenue that reflect these market characteristics in this report.

MethodologyUser Prevalence: The most recent and comprehensive data for Alaska marijuana use come from theNational Survey on Drug Use and Health (NSDUH). The NSDUH is a nationwide survey that collectsstate-level representative samples on a wide variety of substance abuse, addiction, and mental healthissues. The survey is administered by the Substance Abuse and Mental Health Services Administration(SAMHSA) of the U.S. Department of Health and Human Services.

In order to obtain our specific prevalence dataset, the NSDUH offers their “restricted-use data analysissystem” (R-DAS). This system provides access to the most detailed cross-tabulations of marijuana usefrequency and age groups. The R-DAS data allowed MPG researchers to make distinctions between theover-21 user age group, which has access to the regulated retail market, and those under 21 whom donot have access to retail marijuana outlets.

Using a combination of NSDUH survey data and physical use metrics obtained in Colorado andWashington states, the MPG estimates that there are 72,426 residents who use marijuana at leastmonthly. A total of 103,123 residents have consumed marijuana in the past year, including monthly

Overall Estimated StateDemand (Alaska)

14.1 17.8 21.6 Metric Tons

First-Year EstimatedRetail Demand

3.1 4.0 4.8 Metric Tons

First-Year EstimatedRetail Sales

$44,022,894 $55,565,228 $67,729,892 USD

First-Year Estimated TaxRevenues

$5,597,197 $7,064,722 $8,611,372 USD

Low Central High Units

users. We estimate that 653,628 residents are non-users, based upon data from the Alaska Departmentof Labor and Workforce Development.5

User Demand: A key driver for marijuana demand is the state’s user profile. Heavy users typicallyconsume three times as much marijuana in a single day as do occasional users. A recent and importantrevelation is that heavy users account for most of a region’s demand, and that infrequent users have avery small impact upon demand. Marijuana Policy Group (2014), Kilmer et al. (2013),6 and Caulkins(2011)7 are recent studies that highlight this effect and its importance for aggregate market sizeestimates.

Thus, a careful depiction of the Alaska state user profile is needed to estimate demand. MPGconstructed a user profile by obtaining the Alaska age 21 and over population of past-month and past-year marijuana users from the NSDUH and applying a frequency distribution obtained from the recentMPG Colorado study.8 Adjustments for state population growth and NSDUH survey respondentunderreporting were also applied.9 This profile is shown in Table 3.

Table 3.Alaska Marijuana UsersOver 21 Years Oldby Frequency of Use, 2016

Source:

NSDUH R-DAS;Alaska Department of Laborand Workforce Development;MPG Estimates.

In Washington State, and in Colorado (and elsewhere), user demand was shown to be highly-correlatedto frequency of use. Using a combination of user demand statistics from the RAND group,10 as well asColorado-specific data,11 we apply the following demand characteristics to each user frequency cohort inthe same manner as done in Colorado. Heavy users in Alaska, like heavy users in Colorado andWashington, are estimated to demand between 1.3 – 1.9 grams of marijuana per use day, with a centralestimate of 1.6 grams. Less frequent users (20 days or fewer per month), consume between 0.43 – 0.95grams, with a central estimate of 0.67 grams per user day.12

User prevalence is combined with demand quantities to calculate marijuana demand by Alaskaresidents, shown in the table on the following page.

State of AlaskaUse Frequency

Less than once per month 30,6971-5 days per month 25,1546-10 days per month 7,68111-15 days per month 3,26416-20 days per month 5,95321-25 days per month 8,20426-31 days per month 22,169

Yearly User Total 103,123Monthly User Total 72,426

AdjustedPopulation

Table 4. Marijuana Demand by Alaska Residents, 2016 (in Grams)

Source: Estimates are based upon previous findings and upon the Colorado Marijuana Use Survey.

The result here, as found in Colorado and Washington, is that the heaviest marijuana users in the stateaccount for a significant majority of the marijuana demand. This demand profile has importantimplications for the level of retail sales adoption within the state. The heaviest users are also the mostprice-sensitive. This means that if retail prices are high, compared to black market prices, the heaviestusers are unlikely to convert to retail, and that tax revenues would be lower.

Retail Purchases

It would be naïve to assume that all users will simply stop using their existing marijuana supplier, andwould all switch to retail marijuana outlets. Instead, each cohort would have a different propensity tochange suppliers between their existing street provider or friend, and a retail outlet. The heaviest users,some of whom are medical users who have prescriptions for marijuana are almost certain to remainwith their current supplier. The lessons learned in Colorado in 2014 are particularly important in taxestimation in other states as retail conversion has lagged behind expectations in the nascent market.

The MPG estimates a first year “conversion” propensity as shown in Table 5.

Table 5.Retail ConversionFactor by Use Frequency,Alaska, 2016

Source:

Marijuana Policy Group.

The least frequent users will have the highest propensity to switch to retail suppliers, because they arethe least price-sensitive13, and because they are infrequent buyers, so they do not have establishedrelationships with current suppliers (either medical or black market).

User Cohort

<1 36,836 55,254 110,509 0% 30%1-5 327,007 503,088 716,900 3% 24%6-10 299,549 460,844 656,703 3% 7%11-15 220,667 339,488 483,771 2% 3%16-20 557,160 857,170 1,221,467 5% 6%21-25 2,943,746 3,623,071 4,302,397 20% 8%26-31 9,683,588 11,918,263 14,152,937 67% 21%

Total (Metric Tons) 14.1 17.8 21.6 100% 100%

Estimate Range Share ofDemand

Share ofUsersLow Mean High

User Cohort

<1 74% 40,8881-5 74% 372,2856-10 68% 313,37411-15 68% 230,85216-20 45% 385,72621-25 33% 1,195,61426-31 12% 1,430,192

3,968,93122%

Retail Demand (Advanced Conversion)Weighted Average Conversion Factor

FactorRetail

Demand

Five-Year Sales and Tax Revenue Projections

The MPG retail marijuana demand model is used to identify sales and revenue projections over a fiveyear time horizon, between 2016 and 2020. Table 6 shows these values.

Table 6: Estimated Retail Sales and Revenue Values for Alaska



Retail sales demand in 2016 is based upon a conversion factor of 22.4%, which reflects the retaildemand conversion rates from Colorado. The conversion rate assumed in Alaska is higher than the ratefrom Colorado, because Colorado had a large, pre-existing medical marijuana dispensary network.These dispensaries offered relatively low-cost marijuana in convenient storefront locations to many ofthe state’s heaviest users.

Since Alaska does not have a deep network of pre-existing medical dispensaries, but instead a loosenetwork of marijuana care-givers, we expect the initial conversion rate to be higher, at 22.4%, ratherthan approximately 18%, which is the estimated conversion rate to this date in Colorado.14

Conversion Rates and Elasticity of Demand

Over time, the most important factor that will drive retail demand in Alaska is relative price. If retailprices are high, then heavy users, who account for 75% of the state demand, will continue to chooselower-cost black and grey market sources. If the price of retail marijuana declines, then each user type(user cohort) will begin to convert from black and grey market suppliers, toward legal retail suppliers.The rate of conversion depends upon each user cohort’s cross-price elasticity of demand.

The cross-price elasticity of demand represents the percentage change in demand for a givenpercentage change in relative price between retail marijuana and black or grey market marijuana. Forthe Alaska projections, the MPG assumes a fixed price for black and grey marijuana and uses an initialbenchmark conversion factor, based upon the Colorado first-year experience. This simplifies themathematical formula that is used for demand from a cross-price elasticity formula, into an own-priceelasticity of demand formula.15

The own price demand formula, is then written as:=Where:

DC equals the number of grams demand from retail suppliers by cohort C.

D0 equals the reference year estimate of demand by cohort C

YearPrice per Gram

Retail Sales Value ($) $55,565,228 $64,835,925 $79,908,625 $91,270,074 $106,916,870Tax Revenues ($) $7,064,722 $9,617,329 $14,223,735 $18,051,192 $23,789,003

2016 2017 2018 2019 2020$14 $12 $10 $9 $8

P-bar is the reference year price of one gram of marijuana flower

P is the current price of one gram of marijuana flower

σ is the elasticity of demand between the reference price and the current price of marijuana(where the reference price could also refer to the black or grey market price).

Each user cohort has a different elasticity of demand. For irregular and rare users, the elasticity ofdemand is low. For those cohorts, occasional marijuana purchases represent a small portion of totalincome. The savings from finding lower-cost marijuana in one- or two-gram amounts is too small tojustify extensive price shopping. Those users therefore have a higher propensity to pay relatively highprices, in order to obtain the product quickly and easily.

For the heaviest users, the price elasticity of demand is the highest. For these users, the budget sharefor marijuana is large, and because they are regular consumers, it makes sense to shop carefully in orderto find low-cost marijuana. This makes the heaviest users the most price-sensitive. Table 7 lists theMPG estimate for price elasticity of demand by cohort. As the number of user days increases, theaverage monthly budget for marijuana increases, and consequently the sensitivity to marijuana pricing.

Table 7.Price Sensitivity Estimates for Marijuana Users, Basedupon Frequency of Use

Source:

Marijuana Policy Group.

In order to project Alaska marijuana sales and state tax revenue, the price elasticity of demand iscombined with projected marijuana prices. Most economists who study the market for legal marijuanabelieve that marijuana prices will decline significantly. For example, in a California study, economists atthe RAND Corporation state:

“The pretax retail price of marijuana will substantially decline, likely by more than 80 percent.The price that consumers face will depend heavily on taxes, the structure of the regulatoryregime, and how taxes and regulations are enforced.”16

The precipitous decline in retail prices is expected because the cost of marijuana production (cultivation)is low, relative to current retail or street prices. A study for the Washington State Liquor Control Boardestimated that tax-compliant growing operations would enjoy a 53 percent net margin on production.17

While the MPG agrees that production costs are quite low, we disagree that prices will approachmarginal cost with certainty. Our experience in Colorado is more subtle and complex. After analyzingdetailed sales transactions by medical marijuana dispensaries and recreational sales outlets, we found asegmented market, where ‘bulk’ buyers, who purchase in units of one ounce, received significantdiscounts compared to retail customers, who purchased in units of one gram. The bulk buyers paid onaverage $5 per gram (pre-tax), when buying in bulk (one ounce per transaction). On the other hand,

User Cohort(Use - Days per Month)

<1 0.21-5 0.56-10 0.711-15 0.816-20 1.021-25 2.026-31 3.0

Price Elasticityof Demand

retail store transactions, where the average transaction size was 3-5 grams (often sold in “eighths”which are 3.5 grams). For these transactions, the average retail price was $14.50.18

For the purposes of this analysis we begin with a first-year reference price of $14 per gram. This price issimilar to the Colorado first year retail price. It does not reflect the relative cost of living differential thatexists in Alaska.19 The MPG then estimates that retail marijuana prices will decline by 43 percent overthe next five years, when measured in 2014 dollars, from $14 per gram in 2016, to $8 per gram in 2020.Finally, the price dynamics can be combined with each user type’s demand characteristics, to projectretail sales between 2016 and 2020. Table 8 shows the results. Demand is shown for each user type, foreach year. Total quantity demanded and total sales and tax revenues are shown at the bottom of thetable.

Table 8: Retail Demand Projection, Alaska, 2016-2020.



During the first year of legalization, we estimate that 22.4% of state demand will be supplied throughretail outlets. Over time, if prices decline, the share of legal marijuana sales will increase, as a share oftotal marijuana demand. By 2020, MPG expects retail marijuana prices decline to $8, total demandincreases to 13.4 metric tons, and retail sales equal $106.9 million. If the state continues to levy a unit-based tax upon marijuana, equal to $50 per ounce, then state tax revenues would equal $23.8 million in2020.

The MPG would like to emphasize that demand for retail marijuana is dependent on the relative price,compared to alternative supply channels. If retail prices increase significantly, then most heavy userswill avoid this supply mode and buy marijuana from black or grey market sources as possible.

$9 $8

<1 0.2 40,888 42,168 43,735 44,666 45,7311-5 0.5 372,285 402,114 440,494 464,321 492,4876-10 0.7 313,374 349,080 396,600 426,956 463,64911-15 0.8 230,852 261,151 302,160 328,732 361,21416-20 1.0 385,726 450,014 540,017 600,019 675,02121-25 2.0 1,195,614 1,627,363 2,343,403 2,893,090 3,661,56726-31 3.0 1,430,192 2,271,091 3,924,446 5,383,327 7,664,933

3,968,945 5,402,994 7,990,862 10,141,119 13,364,60922.4% 30.4% 45.0% 57.1% 75.3%

YearPrice per Gram

$55,565,228 $64,835,925 $79,908,625 $91,270,074 $106,916,870$7,064,722 $9,617,329 $14,223,735 $18,051,192 $23,789,003

$8

Retail Sales Value ($)Tax Revenues ($)

Year and Price for One Gram of Marijuana

Quantity of Marijuana Demand - By User Type and Year

2016 2017 2018 2019 2020$14 $12 $10 $9

User Cohort20172016 2018 2019Demand

Elasticity

Total Retail Sales (Grams)Share of 2016 Demand

$14 $12 $102020

Notes

1 The 2010-2011 are the most recent estimates published by SAMHSA that can be customized by age group. Seehttp://www.icpsr.umich.edu/icpsrweb/content/SAMHDA/rdas.html2 MPG Colorado report is available at https://www.colorado.gov/pacific/enforcement/forms-publications-marijuana-enforcement-division3 Our estimates cite marijuana flower, which is assumed to include marijuana flower as well as trim equivalent for edibles andconcentrates as part of the total.4 http://alaskacannabisinstitute.com/wp-content/uploads/2014/07/ACI_Alaska-Marijuana-Market1.pdf5 http://laborstats.alaska.gov/pop/estimates/data/TotalPopulationBCA.xls6 Kilmer, Beau, Jonathan P. Caulkins, Gregory Midgette, Linden Dahlkemper, Robert J. MacCoun, and Rosalie Liccardo Pacula.2013. Before the Grand Opening: Measuring Washington State’s Marijuana Market in the Last Year Before LegalizedCommercial Sales. RAND Drug Policy Research Center.7 Kilmer, B., Jonathan Caulkins, Rosalie Pacula, & Peter Reuter 2011. Bringing perspective to illicit markets: Estimating the sizeof the U.S. marijuana market. Drug and Alcohol Dependence, 119, 153–160.8 The appropriate NSDUH R-DAS prevalence distribution for Alaska was unavailable due to privacy restrictions. Colorado’s largercohort by frequency populations were large enough to provide a useful benchmark.9 See page 13-15 of the MPG Colorado report.10 Kilmer, et. al., 201311 MPG, 2014.12 For reference, a regular sized “joint” contains approximately 0.5 grams of marijuana flower.13 Infrequent users are less price sensitive because they buy small quantities, which represent a very small share of theirmonthly discretionary budget. Heavy users are highly price sensitive because marijuana often represents a large share of theirmonthly discretionary budget.14 Note that the Colorado conversion rate applies only to Colorado residents. Total retail sales, when tourists and visitors areincluded, is a higher percentage of state demand. In their report to the State of Colorado, the MPG estimated that 22% of totaldemand would be supplied through the recreational retail modality, and another 30% would continue to be supplied throughthe medical marijuana dispensary modality.15 We could continue to call the formula a cross-price demand formula, assuming that the alternative price is equal to the base-year price. In either case, the reference price, P-bar, equals $14 per gram.16 Executive Summary, page 2, in “Altered State? - Assessing How Marijuana Legalization in California Could InfluenceMarijuana Consumption and Public Budgets”, RAND Occasional Paper, 2010.17 See: Zamarra (2013), “Modeling Marijuana Businesses and Costs of Legal Compliance,” BOTEC Corporation, I-502 Project,August 10, 2013.18 See: Marijuana Policy Group (2014), “Average Market Rate Methodology for Colorado Wholesale Marijuana Sales”, ColoradoState Department of Revenue. June, 2014.19 For example, the Fairbanks Council for Community and Economic Research, claims that it costs 25 percent more to live inFairbanks, Alaska than in Tacoma, Washington.

LEGISLATIVE RESEARCH SERVICES - Alaska Senate...marijuana is legal have time to establish and refine...

Documents

Transcript of LEGISLATIVE RESEARCH SERVICES - Alaska Senate...marijuana is legal have time to establish and refine...