'State-Legal' Cannabis Is Not What It May Seem

As each new state in the U.S. legalizes adult-use cannabis and develops a regulated industry to allow retail sales, cultivation, processing, testing and more, industry advocates and cannabis consumers usually enthusiastically applaud. But if you look a bit closer at these “legal” states, a not-so-pretty picture emerges: Within those states, where cannabis sales are supposedly legal, an average of 47% of local governments prohibit retail sales entirely—either through “opting out” of the adult-use programs, or voting to ban sales or implementing zoning to prohibit sales (and often cultivation and other types of businesses). And seven states have no idea how many local governments prohibit sales or any other type of cannabis business. Some states require this information from municipalities and try to track this, but not all report, so it’s not all encompassing. Others don’t proactively seek out nor update this data. (Editor’s note: The average does not include the two states that don’t allow local opt outs.)

This raises the questions: If in the majority of the state no retail sales are legal, is it really a “state-legal” program? And why aren’t all states tracking what’s happening in their regulated markets?

States with the highest percentage of counties, cities, and/or towns and villages that don’t allow adult-use cannabis sales paint an even starker picture.

In Maine, where the default is for municipalities to be opted out for all adult-use cannabis license types (and towns must affirmatively opt in for some or all adult-use license types), the percentage of local governments that don’t allow retail cannabis sales inches precariously close to encompassing the entire state (83%). And 74% don’t allow cultivation. (Maine is one of the few states that tracks cultivation opt outs or bans.)

In New Jersey, one of the more highly anticipated legal cannabis markets, three-fourths of cities have opted out of retail sales, according to the most recent information tracked by cannabis retail development firm CannDev. (The New Jersey Cannabis Regulatory Commission does not actually track this data.) So cannabis retail is permitted in just a quarter of the state’s localities—despite that ballot Question 1 was approved by voters in all 21 counties, The Associated Press reported.

The picture in Michigan—which allows municipalities to opt in or out of adult-use cannabis businesses—is similar. Nearly three-fourths of the state bans retail sales—74% of local governments have opted out of the Michigan Regulation and Taxation of Marihuana Act.

And then there’s California, one of the most progressive (the first to legalize medical cannabis in 1996) and largest cannabis markets with $4.4 billion in adult-use sales in 2023, according to the Department of Cannabis Control (DCC). Nearly two-thirds (60%) of the state’s cities and counties don’t allow retail sales, according to the DCC, and more than half (54%) don’t allow cannabis businesses of any type.

Not Allowing Local Opt Outs

Just two states—Maryland and New Mexico—don’t allow municipalities to opt out of retail sales.

“Maryland counties and municipalities may establish reasonable zoning restrictions for cannabis licensees, but may not prohibit these facilities within their jurisdiction,” David Torres, deputy chief, Office of Communications and Outreach for the Maryland Cannabis Administration (MCA), told Cannabis Business Times. “The exception is for on-site consumption establishments, which a county or municipality may ban in their jurisdiction.”

In New Mexico, the Cannabis Regulation Act establishes that a local jurisdiction: may “adopt time, place and manner rules that do not conflict with the Cannabis Regulation Act or the Dee Johnson Clean Indoor Air Act,” including rules that limit license numbers and operating times; and may not “prevent transportation of cannabis products on public roads by a licensee … in compliance with the Cannabis Regulation Act” nor “completely prohibit the operation of a licensee.”

While Minnesota will not allow local governments to prohibit cannabis businesses from operating within their jurisdictions starting Jan. 1, 2025, “Minnesota Statutes 342.13 (j) also states that if a county has one active registration for every 12,500 residents, a city or town within the county is not obligated to register a cannabis business,” Peter Raeker, communications planner for the Department of Agriculture, Office of Cannabis Management Implementation (OCMI), told CBT. So even after the January 2025 transition, some towns will not have retail sales.

Legalization Goals Falling Short

The interactive map above shows each state’s percentage of local government opt outs or prohibitions on adult-use retail sales, as well as states where no data is available and the one state (Delaware) where it is too early in the state’s adult-use program to know, along with details about the data.

States that allow local governments to opt out of the adult-use programs or prohibit certain types of licensed operators typically do so to enable those communities that don’t want adult-use cannabis businesses within their borders to have a way to prevent them from establishing there. However, in 15 of the 24 adult-use states, citizens voted to legalize adult-use cannabis. (The other nine states legalized through their respective legislatures.) 

And while local options to opt out and ban cannabis businesses may make certain communities or members of those local governments happy, they also hinder the goals of many citizen initiatives and legislature-driven laws.

One goal of making possession legal is to end the continued societal harms of the war on drugs in those states. Arrests for cannabis possession declined by 32.2% from 2020 to 2021.

Another goal of adult-use legalization is to enable consumers access to safe, tested cannabis. Implementing regulations stipulating often rigid (and expensive) testing requirements for cannabis products is one way that regulators have aimed to achieve that goal. They also aim to eliminate existing, often sizeable, unregulated cannabis markets, an aim that has fallen far short of succeeding.

The unregulated market in the U.S. is more than double the size of the legal market, CBT reported in January 2023, citing information from New Frontier Data.

States and cities also have continued to struggle to eliminate the unregulated market, despite adult-use legalization.

In February 2023, the New York City Police Department estimated 1,300 unlicensed cannabis establishments exist in New York City alone. Fifty-five percent of New York state’s cities, towns and villages have opted out of allowing adult-use retail sales, according to the New York Office of Cannabis Management.

In California, unlicensed operations outnumbered state-licensed operations in many of the state’s biggest cultivation areas by 10 to 1 as of October 2022, nearly five years after the state began legal adult-use cannabis sales (on Jan. 1, 2018). And, “a February [2024] analysis by the Pew Research Center found that LA County has 1,481 dispensaries. But only 384 dispensaries in the county have active licenses, according to the [California Department of Cannabis Control] data,” CBT reported.

With high percentages of most adult-use markets’ municipalities prohibiting retail cannabis sales, it would seem this leaves the door wide open for the unregulated market to continue to thrive.

Generating significant tax revenue from cannabis sales is yet another goal driving state legalization. But that goal often falls short of expectations as well. In California, for example, Gov. Gavin Newsom’s 2024-2025 budget proposal “projects $568.8 million for Tier 3 programs [such as child care programs, environmental groups, youth prevention groups and law enforcement]” from cannabis taxes, CBT reported. This is, however, more than $100 million below a threshold of $670 million to avoid a cannabis excise tax hike established in Assembly Bill 195, which Newsom signed to eliminate the cultivation tax in an effort to help the state’s struggling licensed cannabis businesses.

The vast majority of states don’t withhold or limit allocations of cannabis-derived tax revenues from municipalities that prohibit adult-use retail sales. One exception is Michigan, which allocates a percentage of tax revenues specifically to municipalities where cannabis retailers are located. Ohio’s proposed adult-use law calls for a 10% excise tax, 36% of which would go to municipalities that host licensed cannabis operators, though lawmakers have proposed redirecting that money—and can do so.

The Cannabis Industry’s Achilles Heel?

High tax burdens on cannabis businesses, along with high costs of regulatory compliance and competition from the unregulated market, are among the significant hurdles causing the still fledgling industry to struggle and many businesses to shutter. In California, for example, the number of active cultivation licenses has shrunk from 8,493 at the beginning of 2022 to fewer than 5,400 as of April 2024, according to DCC data,” CBT reported.

The prohibition of cannabis sales in an average of nearly 50% of municipalities in state-legal adult-use markets is certainly not going to help.

Editor’s note: Virginia is one of the 24 states that have passed adult-use legislation, but as it legalized possession only, it is not included in this special report because there’s no legislation in place for a commercial retail/cultivation market and therefore no opt in/out decisions for municipalities to make.

U.S. map and state graphics by Katelyn Mullen.