Ohio’s Adult-Use Cannabis Bill Still Needs to Work Out Kinks
AB FinWright’s Abraham Finberg, Rachel Wright, and Simon Menkes explain the legislative battle over Ohio’s latest cannabis bill and its potential impact on social equity.
Faced with legislative inaction on cannabis, Ohio voters approved Issue 2 on Nov. 7 and made the state the 24th in the US to allow adult-use sales. The ballot initiative, if passed, would lightly tax adult-use cannabis, and focuses strongly on social equity.
The creation of a citizen-initiated statute is unusual; the Buckeye State has only had 13 since the process began in 1912, and of those, only four have passed.
But as passionate as Ohio’s pro-adult-use citizens are, those who want a more conservative, business-oriented approach are equally dedicated. They’re working to adjust Issue 2 to remove social equity provisions and emphasize applicant fiscal responsibility and law enforcement funding.
Social Equity State
Issue 2 emphasizes low taxation of cannabis businesses—a 10% state excise tax on top of the existing 5.75% sales tax, and on retail sales only. Proponents believe this will put adult-use businesses on more equal footing with potential illegal competition and stifle an illicit market before it begins.
Issue 2 also stresses social equity and establishes a cannabis social equity and jobs program to “provide financial assistance and license application support to individuals most directly and adversely impacted by the enforcement of marijuana-related laws.”
This includes mandating any preference in awarding adult-use licenses advances social equity goals, such as “establishing an adult use cannabis industry that is equitable and accessible to those most adversely impacted by the enforcement of marijuana-related laws” and “reducing barriers to ownership and opportunities” for those so impacted.
Excise taxes prioritize the cannabis social equity and jobs fund (36%), a fund for adult-use communities to support social equity in their region (36%), and the substance abuse and addiction fund (25%).
Ohio State University estimates that by year five of operation, Ohio could see $276 million to $403 million in annual tax revenues from cannabis sales, so the support for social equity would be significant.
Opposition Counters
State legislators added restrictions to Issue 2 after its passage, attaching them to a sleepy liquor-distillery bill called House Bill 86. The restrictions would have eliminated home grow, increased excise taxes from 10% to 15%, taxing both retail and cultivation sales, and sent most taxes to law enforcement. Also, counties would be allowed a 3% local tax on adult-use sales.
A massive email and phone backlash ensued, forcing legislators to delete many of the restrictions. Home grow was restored and the 15% excise tax was removed from cultivation sales but kept on retail sales.
Some new pro-cannabis mandates were added, including expungement of minor prior cannabis convictions and approval for medical cannabis dispensaries to sell adult-use cannabis, which would mean adult-use sales could begin first quarter of 2024 rather than the third quarter of 2024, as allowed in Issue 2.
However, legislators stood firm on HB 86’s shift from social equity to one that stresses business acumen and funnels most excise taxes to crime control.
HB 86 emphasizes business acumen in adult-use license applications. Applicants are to be graded on depth of financial resources as well as a business plan, operations plan, security plan, financial plan, and goals for generating jobs and economic development. In addition, the state will be looking to the applicant to hire local residents, veterans, disabled people, women, and minorities.
HB 86 further states that even if a lottery system is used to award licenses, preference shall be given to applicants ranked by an “impartial and evidence-based process.” It permits employers to fire or refuse to hire employees because of cannabis use.
The bill removes much of the language and all the funding associated with social equity. If it becomes law, it will direct 39% of taxes to law enforcement and law enforcement training, 28% to jail construction, 9% to substance abuse treatment, 9% to Ohio’s 9-8-8 suicide hotline, and the balance to various community programs.
However, the bill does instruct the state’s Department of Development to issue at least 15% of adult-use licenses to entities owned and controlled by Black, American Indian, Hispanic, and Asian residents.
HB 86 defines “owned and controlled” as owning at least 51% of a business as well as “having control over the management and day-to-day operations of the business and an interest in the capital, assets, and profits and losses of the business proportionate to their percentage of ownership.”
Outlook
The struggle to find middle ground in adult-use cannabis in Ohio is ongoing. HB 86 found strong bipartisan support in the state Senate, which approved the bill on Dec. 6. The bill is pending final approval in the House.
Two other adult-use cannabis bills, HB 341 and HB 354, are being discussed. Both are similar to Issue 2—HB 341 only adds some funding for law enforcement, while HB 354 leaves Issue 2’s social equity funding priorities the same but adds a 10% tax on cannabis cultivation.
HB 86, or something close to it, is expected to pass—but its final form is unclear.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Abraham Finberg, managing partner at AB FinWright, has worked in the cannabis sector since 2009, counseling clients in business advisory and tax, from start-up through M&A and IPO.
Rachel Wright, managing partner at AB FinWright, specializes in cannabis accounting and taxation for multi-state and multinational entities.
Simon Menkes, CPA, supports AB FinWright’s clients and advisers through accounting and advisory services.
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