Cannabis Legalization in Key States: New Jersey Becomes the First State in the Tri-State Area to Legalize Recreational Use

The approved measure lays out a tentative taxation plan, establishing a state sales tax rate of 6.625 percent on marijuana sales and permitting cities to charge up to an extra two percent tax on sales. Based on Colorado’s experience, New Jersey projects that legal pot will eventually generate nearly $2 billion in revenue annually, amassing approximately $126 million in tax revenue. That said, it will take time for the market to develop. The state recognizes that Colorado’s tax revenue didn’t grow to this amount until four years after its cannabis market was established (and nearly six years after it legalized recreational use).

Also, essential legislation still must be enacted before legal cannabis sales begin on Jersey shores. Most significantly, the New Jersey legislature must decriminalize marijuana possession and create a regulatory commission to manage cannabis distribution. This process took Massachusetts about two years.

But New Jersey may act faster.  There is a bill already before the governor – New Jersey Assembly Bill 21 – to amend the existing medical marijuana framework to also cover recreational use. The bill would decriminalize recreational cannabis use by adults over 21 and create a regulatory system for recreational sales. Some have criticized the bill’s approach for intertwining medical and recreational licensing because many feel New Jersey’s medical system is a disaster. Critics of the system emphasize that businesses struggle to acquire medical treatment center licenses because of inconsistencies scoring license applications and technical glitches on the application platform, and that, as a result, there are not enough medical dispensaries and cultivation sites to meet patients’ cannabis demands.

However, this medical overlap will likely expedite recreational cannabis sales, as the bill includes a shortcut measure that would permit certain approved medical marijuana operations to begin selling cannabis to customers for recreational use immediately.

Proposed Regulatory and Licensing System

Under the proposed system, the existing Cannabis Regulatory Commission would implement and enforce New Jersey’s regulations. The Commission would issue licenses in six “marketplace” classes, comprised of (i) growers, (ii) processors, (iii) wholesalers, (iv) distributors, (v) retailers, and (vi) delivery services. Initially, the number of grower licenses would be capped, but in the future, the Commission would determine a maximum number of licenses in each class based on market demand.

License applicants would be required to submit documents reflecting their business model, including (i) an environmental impact plan; (ii) summary of safety and security plans; (iii) summary of applicants’ business experience; (iv) description of proposed location; (v) a community impact statement; (vi) a workforce development and job creation plan; and (vii) a business and financial plan. Applications would then be evaluated on a point system considering these and other factors the commission deems relevant.

The proposed system is clearly intended to benefit New Jersey residents. Only businesses that are run by a “significantly involved” New Jersey resident who has lived there for two years or more are eligible to apply for the first licenses, and applications from businesses that have a New Jersey resident of at least five years significantly involved are given preference. The bill is also aimed at supporting small businesses; it sets aside 25 percent of licenses for “microbusinesses” that operate in less than 2,500 square feet, with fewer than 10 employees, and grow fewer than 1,000 associated plants each month. These microbusiness set asides are likely an effort to also prevent large, multi-state cannabis companies from dominating the New Jersey market and bullying local competitors.

Confronting Employment Issues

The bill also limits when and how employers can discipline employees for using cannabis. Employers would be barred from taking adverse action based on an employee’s recreational marijuana use outside of work but would remain free to discipline employees for cannabis use where they have a “rational basis for doing so, which is reasonably related to the employment.”  This vague standard is identical to New Jersey’s qualified protection of employees’ tobacco use. Courts still have not interpreted that language. N.J. Stat. Ann. § 34:6B-1. Thus, while the door remains open for employers to discipline employees for out-of-work cannabis use, the scope of that power remains unclear.

The bill further allows employers to continue to drug test employees where there is reasonable suspicion that an employee is using or under the influence of cannabis at work. Like Oregon and Washington’s frameworks and Arizona’s recently implemented one, New Jersey law explicitly states that the law does not interfere in any way with employers’ right to maintain a drug-free workplace or require employers to tolerate cannabis use or intoxication in the workplace.

Addressing Historical Racial Disparities

New Jersey is also addressing another significant issue in its regulatory scheme: whether and how to address historical racial inequities. In the past, the discussion about legalization focused on optimizing the state’s economic benefit, but the dialogue has shifted to focus also on addressing historical racial disparities. Legalization supporters nationwide have rallied behind findings that Black Americans are 3.64 times more likely to be charged with marijuana possession, a number consistent with New Jersey’s experience. Advocates demand that recreational distribution schemes take into account this reality and operate to the benefit of communities that have historically suffered under cannabis prohibition.

To address these concerns, New Jersey law includes a “social equity” excise tax on cannabis purchases to fund communities impacted by prohibition, although critics have emphasized the inadequacies of this approach. For one, the excise fee is optional; thus the Commission is free to reject it entirely. Further, if the tax were implemented, the aggregated funds would be distributed to various “social equity programs,” including educational support, economic development, social support services, and legal aid, but the bill does not specify the specific communities entitled to these benefits.

Assembly Bill 21 also gives preference to businesses located in or operated by residents of “impact zones” in the license application process. These zones are intended to reflect areas disparately impacted by prohibition and include cities with populations exceeding 120,000, as well as those that rank in the top 40 percent of small-amount possession arrests, in the top 15 percent of annual average unemployment, and have a crime index of 825 or higher. The bill further expands the jurisdiction of the Cannabis Regulatory Commission’s existing Office of Minority, Disabled Veterans, and Women Medical Cannabis Business Development to also manage recreational cannabis. The office would promote participation by socially and economically disadvantaged communities in the emerging industry, with a goal that 30 percent of all issued licenses would be issued to minority, women’s, and disabled veterans’ businesses.

New York, Pennsylvania, and others will look to the Garden State as an example of whether it’s effective to weave recreational systems into existing medical bureaucracy and whether its efforts to address historical racial inequities are effective. Overall, New Jersey’s approach will likely set the stage in the Tri-State area and may expedite legalization in surrounding states. Just this month, Governor Andrew Cuomo introduced a recreational use proposal, emphasizing how New York stands to benefit from legalization, but likely also recognizing that Manhattanites will soon lie a tunnel away from eager Hoboken dispensaries.