SPRINGFIELD — For weed enthusiasts around the world, 4/20 — the “high” holiday — is a day to toke up with friends and collectively celebrate cannabis, a product now legal for recreational use in 18 U.S. states.
In Illinois, lawmakers gave the green light in 2019 and the legal market opened in January 2020. Now in year three, legal sales at Illinois dispensaries continue to grow year-over-year, including nearly $1.4 billion in sales in 2021 alone.
But at the same time, the nascent industry’s growth has been blunted going on two years due to lingering litigation over the lottery process for awarding new dispensary licenses.
Cannabis Business Association of Illinois executive director Pamela Althoff summed up the state of the state’s legal recreational-use cannabis industry in one word: “Halted.”
“With the legal battles ongoing and the temporary restraining order placed on dispensaries, we’ve halted any real growth and advancement of the cannabis industry in Illinois,” Althoff said.
This has left lottery winners, many of whom have invested significant funds in their bids for licenses, in limbo while also delaying the diversification of what is still a nearly all-white and all-male industry on the dispensary side.
The next few months may be critical in determining what the future of the recreational marijuana industry looks like in this state over the next few years and decades.
Rolling in the green
Legalized recreational marijuana has been a hit in Illinois.
The state’s 110 licensed dispensaries have raked in more than $2 billion in the past 27 months. Sales hit nearly $1.4 billion in the state in 2021, more than double the $669 million in its inaugural year of 2020.
And in the first three months of 2022, sales are continuing to grow, albeit at a slower pace.
“I don’t think it’s the lack of dispensaries per se,” said Chris Stone, a Springfield consultant who advises existing cannabis businesses and those looking to enter the market. “And I don’t think it’s the lack of product. But I do think that the demand has to a certain degree plateaued.”
These sales brought more than $175 million in tax revenue into state coffers in 2020, more than $408 million in 2021 and about $113 million in just the first quarter of 2022.
This pot of tax revenue is dropped into six main buckets, including 35% towards the state’s a general revenue fund and 25% for a program called Restore, Reinvest and Renew (R3), which awards grants to communities that have been harmed by violence, excessive incarceration and economic disinvestment.
Another 20% goes toward a fund to support mental health and substance abuse services at local health departments, 10% is earmarked for the state’s “rainy day” fund, 8% is for a law enforcement grant program and 2% is diverted to the state’s drug treatment fund.
Besides the state, the main beneficiaries of this windfall are existing dispensary license holders, who have been able to operate since Jan. 1, 2020, under an “early approval adult-use” license.
This provision in the 2019 law allowed for those in the state’s medical cannabis industry to sell recreational pot at their existing dispensaries and the right to open another standalone dispensary for recreational sales only.
In the years since, some of these licenses have been sold to large multi-state cannabis companies seeking entry into the market. The state allows each ownership group up to 10 dispensary licenses.
Lagging social equity
The legalization legislation also included a heavy social equity component.
Some of that has been fulfilled via the expungement of nearly 500,000 non-felony cannabis-related arrest records by the Illinois State Police, and through the R3 program, which awarded 80 grants totaling about $31.5 million in January 2021. This year, more than $45 million in funds will be available to organizations.
Danielle Perry, the state’s cannabis oversight officer, said that Illinois was “setting a standard” with its emphasis on social equity, including investing in impacted communities, repairing past harms with expungements and attempts to diversify the industry.
“No state before Illinois did this work,” Perry told Lee Enterprises in an interview Monday. “And what I think is most powerful about it is not only did we do it, but you see the states that legalized after us — New Yorks, the New Jerseys — they continued this work.”
While the state has made progress on this front, one of the major hurdles left is getting people disproportionately impacted by the War on Drugs, especially Black and brown people, a stake in the industry.
Of 226 people with an ownership stake in an Illinois dispensary as of last July, 209 of them were white, according to a report produced by the Illinois Department of Financial and Professional Regulation. There was only one African American and four Hispanic Americans with an ownership stake.
“The true intent alone has not been realized,” said state Rep. LaShawn Ford, D-Chicago. “And to tell the truth, it is actually making the situation what you call ‘adding insult to injury’ because the men and women that have been in communities that’ve been hardest hit by this … are still not able to benefit from the new law.”
A large reason for this has been years of lawsuits over the state’s lottery process.
Initially, 75 dispensary licenses were to be awarded in September 2020, but that lottery yielded just 21 applicants being awarded licenses out of more than 900 applicants. Many failed to qualify simply because they did not have a military veteran as part of their group, which was worth additional points.
This resulted in a number of lawsuits, which led to a delay in those licenses being awarded.
In an attempt to resolve this, state lawmakers approved and Pritzker signed legislation in 2021 establishing 110 new dispensary licenses.
Fifty-five licenses would be awarded via a lottery open to all social equity applicants who scored 85% or higher on their application. A third lottery would be held for even more social equity candidates.
These were held in late July and early August 2021.
A lottery for the 75 initial licenses was held among the original top-scoring applicants after they were allowed to correct “deficiencies” on their initial applications.
But as happened the first time, a slew of lawsuits ensued.
One case challenges the constitutionality of the state’s lottery process. With that ongoing, a Cook County judge issued a stay in July 2021 that prevents the state from awarding conditional dispensary licenses to lottery winners.
The Illinois Supreme Court last October ordered several other lawsuits from dispensary applicants consolidated into one case, which is still working through the process.
Whether that case gets resolved sooner rather than later remains uncertain, but it appears increasingly likely that a fourth corrective lottery will be held to resolve outstanding concerns from plaintiffs.
“I think that there probably will be a corrective lottery to solve some if not all of the current litigation issues,” Stone said. “And then I think that you probably see conditional awards go out in earnest for all the lotteries.”
But, even if licenses get delivered to lottery winners soon, it will likely be 2023 by the time their doors can open, Stone said.
The diversity numbers would likely stand to improve significantly once licenses are given out as all those who have applied in the latest rounds are considered social equity candidates.
There’s evidence of this on the cultivation side. Last year, the Illinois Department of Agriculture awarded its first 40 craft grow licenses and 32 infuser licenses along with several transporter licenses.
This led to an increase in non-white majority-owned licensees on that side of the industry from zero to 44%. After the resolution of a court case last month, an additional 60 craft grow licenses could be awarded in the coming days or weeks.
“People fixate on the dispensary licenses and base everything that’s happening here in Illinois on that,” Perry said. “But there are more craft grower licenses, there’ll be more infusing licenses, there are more transporter licenses coming.
“There’s so much tunnel vision in cannabis sometimes where the only thing people talk about are the licenses and litigation for dispensaries,” Perry continued. “But you miss the forest for the trees when you completely act as if there’s nothing else happening here.”
Evidenced perhaps no better than by the court cases that have halted the growth of the industry, the future of cannabis in Illinois is still somewhat unclear.
Stone said that “it would be a really good year if you saw 15% growth in the market,” but warned that some changes may be needed to ensure that the industry matures to its full potential.
“I think a lot of people are predicting that this is a $2 billion to $3 billion market in Illinois,” Stone said. “I think that if we don’t look to make some changes to certain aspects of the program, I’m not sure that you’re going to ever get there.”
This could include changes to the tax structure. Currently, there is a 7% wholesale tax, a retail excise tax of 15%, 20% or 25% depending on the product’s THC level and the state’s 6.25% sales tax and the local sales tax rate paid by all retailers.
Cities with dispensaries can add an additional 3% sales tax while counties can add 3.75% in unincorporated areas.
These taxes drive up the price of the product and may cut demand by as much as 25% to 30%, with much of those customers going to the illegal but cheaper market, Stone said.
“If you don’t look to increase the demographic that’s going to be able to purchase and increase the demand, I think that there’s gonna be a lot of people that end up struggling,” Stone said.
With 185 dispensaries set to be awarded and another lottery for 50 additional licenses set for later this year, there be much more pressure to increase the demand to ensure everyone in the industry gets a cut, especially for social equity candidates already at a disadvantage for having to wait nearly two years to receive their licenses.
Even with some speed bumps along the way, Althoff was optimistic about the future of the Illinois market.
“I still think that there’s ample opportunity for people to enter into this nascent market, and we’re still trying to normalize the use of cannabis,” Althoff said.
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April 19, 2022 at 07:55PM