Outdated state regulations are stifling the cannabis industry

The cannabis landscape has shifted dramatically since the first wave of legalization in 2014.

What once were pioneering policies are now outdated shackles, hindering the industry’s growth and failing to meet the evolving needs of consumers and businesses alike.

State marijuana regulators, clinging to frameworks designed for a nascent industry, inadvertently are fueling the illicit market and creating an economic crisis within the regulated sector.

Time for a policy reset

The cannabis sector’s initial focus on public safety was understandable.

Concerns about underage access, impaired driving and potential societal impacts dominated the conversation.

However, this singular focus has created a regulatory environment that neglects the crucial element of commercial viability.

The result is a system where licensed businesses struggle to survive while the illicit market continues to thrive.

One glaring example of this regulatory mismatch is the retail-centric model.

While well-intentioned, the forced reliance on brick-and-mortar retail has proved to be a significant barrier to consumer access and, consequently, market growth.

Many consumers – for various reasons, including convenience, privacy or simple preference – are unwilling or unable to visit marijuana stores or medical cannabis dispensaries.

This artificial constraint on demand severely limits the potential of the legal market.

By limiting access, regulators and policymakers inadvertently are suppressing legal participation in the regulated marijuana market.

This has a cascading effect that limits tax revenue, stifles job creation and ultimately undermines the very objectives of legalization.

The promise of a regulated, tax-generating industry that displaces the illicit market is being squandered by outdated policies.

Illicit market is thriving in current regulatory setup

The persistence of the illicit market is a direct indictment of the current regulatory approach.

Nationally, in 2024, participation in state-regulated marijuana markets was measured at 29.4%, meaning that 70.6% of all cannabis transactions are still conducted in the illicit market.

By failing to create a competitive and accessible legal market, regulators are perpetuating the very problem they sought to solve.

This not only undermines public-policy objectives but also directly contradicts public safety goals.

The illicit market operates without oversight, quality control or age restrictions, posing a far greater risk to public health and safety than a well-regulated, licensed market.

The current system has created an economic crisis for licensed businesses.

Overregulation, high taxes and limited market access have created a perfect storm, forcing many businesses to operate at a loss or even close their doors.

In a national survey conducted by Whitney Economics in 2024, only 27.3% of U.S. cannabis businesses were profitable.

This instability not only harms entrepreneurs and investors but also undermines the long-term viability of the regulated marijuana industry.

It is forcing small businesses to fail – the very same businesses that the original state-reform movements were trying to support.

Benefits of changes before federal marijuana reform

The federal landscape, while still complex, is also evolving.

The increasing acceptance of cannabis at the state level – coupled with growing calls for federal reform – necessitates a more adaptable regulatory framework.

Regulations designed for a time when cannabis was universally illegal simply are not appropriate in a world where a growing number of states have embraced regulating marijuana.

It is time for a paradigm shift.

Cannabis regulators must move beyond the narrow focus on public safety and embrace a more holistic approach that considers the economic realities of the industry.

This requires a fundamental rethinking of existing policies, including:

• Expanding access: Exploring alternative sales channels (such as delivery services), allowing businesses to open social consumption spaces or limited retail partnerships could significantly increase consumer access and market participation.
• Reducing regulatory burdens: Streamlining licensing processes and decreasing excessive compliance costs would help regulated businesses thrive and compete with the illicit market.
• Reevaluating tax structures: Implementing more reasonable tax rates would encourage participation in the licensed market and generate more sustainable revenue in the long run.
• Harmonizing state and federal regulations: As federal policy evolves, states must be prepared to adapt their regulations to create a more cohesive and efficient national market.

The current regulatory frameworks of states are relics of the past, ill-equipped to handle the present and certainly not the future of the cannabis industry.

A comprehensive policy reset is essential to unlock the full potential of this burgeoning market, protect consumers and finally achieve the public safety and economic benefits promised by regulation.

Continuing down the current path will only perpetuate the problems, further entrenching the illicit market and stifling the growth of a legitimate and potentially transformative industry.

Beau Whitney is the president and chief economist at cannabis data and research company Whitney Economics in Portland, Oregon. He can be reached at beau@whitneyeconomics.com.