May 12, 2025 at 06:18 AM
By Guillermo C. Artiles
By Ryan M. Magee
The legalization of adult-use cannabis across numerous U.S. states was driven by more than economic or regulatory motivations; it was a response to decades of disproportionate impact of drug enforcement and an opportunity to build a new, equitable industry from the ground up. At its core, cannabis reform promised not only to end criminal penalties for adult use but also to reinvest in the communities most harmed by prohibition. In many states, this reinvestment included building social equity goals directly into the cannabis business licensing and ownership process. However, several years into legalization, the persistence of illegal cannabis markets poses ongoing challenges to these equity-driven goals. In response, some states have introduced or adopted stricter enforcement strategies aimed at deterring unlicensed sales—raising questions about how to effectively balance regulatory compliance with existing equity and criminal justice reforms.
When the state of New Jersey first addressed adult-use legalization, the Legislature made it clear that decriminalization alone would not suffice. Following the passage of a voter referendum that amended the state constitution to decriminalize cannabis, lawmakers took action by advancing a package of bills that linked legalization to broad criminal justice reform—making New Jersey one of the only states to center expungement and racial equity at the outset of its cannabis policy overhaul. For example, legislators—particularly from communities most affected by these disparities—insisted that any legalization bill include automatic, immediate expungement for low-level cannabis offenses. More ambitious proposals pushed for the expungement of nonviolent convictions beyond marijuana, including certain low-level drug sales. These measures sought not only to end criminalization but also to repair the long-term harm caused by past policies, such as limited job opportunities and social stigma.
In addition to these decriminalization measures, New Jersey, like many other states, built its social equity goals directly into its cannabis business licensing program. When New Jersey first opened its cannabis license application process to aspiring cannapreneurs in 2021, the state granted priority application review to certified social equity businesses and businesses certified by the state as being minority-, women-, or disabled veteran-owned. In sum, New Jersey adopted a bifurcated approach to social equity: swiftly implementing criminal justice reforms while simultaneously promoting communities historically impacted by cannabis enforcement during its licensing process.
However, today, as the industry matures, the continued growth of illegal cannabis markets presents significant challenges to the economic sustainability and regulatory stability of licensed operators, including those intended to benefit from social equity licensing programs. These licensees, often from historically marginalized communities, are required to meet strict compliance obligations, pay significant fees, and navigate complex bureaucratic systems, all while contending with market conditions heavily distorted by unregulated competition. Not to mention, the obvious struggles all licensed cannabis operators grapple with come tax season, given the inability to deduct ordinary business expenses due to IRS Code Section 280E. Contrast this reality with unlicensed sellers, who can divert consumer demand to unregulated (and untested) products without the financial strain of licensing fees, cannabis-specific taxes, and federal and state income tax. This dichotomy not only threatens the viability of the licensed cannabis industry as a whole, but in particular, social equity operators who are intended to benefit most from the new legalization framework.
Even in blue states, the progress of legalization is facing new challenges related to tax policy. In New Jersey, for example, the Cannabis Regulatory Commission has approved an increase in cannabis-related fees, while Maryland has advanced similar proposals. Critics argue that such tax increases could impact consumer behavior by making legal products less competitive with unlicensed alternatives, potentially affecting the viability of licensed businesses—particularly those operating under equity-focused provisions. In response to these concerns, New Jersey’s Senate Bill 4154, introduced at the beginning of 2025, proposed to reclassify the purchase or sale of cannabis from unlicensed sources as a criminal offense—marking a shift from the state’s earlier approach to decriminalization. Although framed as a regulatory safeguard, the bill has drawn criticism from civil rights advocates who argue that it undermines the equity rationale of legalization.
In other jurisdictions as well, policy responses continue to trend toward renewed enforcement measures. For example, in New York, three years after legalization, only 182 licensed dispensaries operate in a state of 20 million people. The resulting vacuum has allowed over 4,000 unlicensed sellers to flourish, often targeting minors with brightly packaged products and operating in close proximity to schools. In response, the state created the Illicit Cannabis Enforcement Task Force, which has shut down hundreds of illegal operations. Localities have also implemented their own, often creative enforcement methods, targeting landlords and other parties deemed to be complicit in unregulated sales. However, the scale of the problem, combined with persistent legal challenges to novel enforcement methods, demonstrates how difficult it is to police an unregulated market into submission.
California faces similar issues. In 2024, state and local enforcement efforts led to the seizure of over $191 million in illegal cannabis, yet the market remains saturated with unlicensed operators. A contributing factor is that nearly 60% of the state’s municipalities still prohibit legal cannabis sales, limiting consumer access to the regulated market. As a state that cultivates far more cannabis than its residents consume, California may soon have to make difficult decisions about ways to improve its enforcement practices.
Challenges to legalization and equity efforts are not limited to illicit market dynamics but are also emerging in the political arena. In Republican-led states such as Montana, Nebraska, Ohio, and South Dakota, lawmakers have introduced measures aimed at modifying or reversing voter-approved legalization initiatives. For example, in South Dakota, a repeal effort targeting medical marijuana access narrowly failed by one vote in committee, despite the measure having passed with 70% public support. These measures often include provisions intended to keep or rollback the criminalized status of cannabis-related offenses.
In Ohio, the legislature recently moved to override several provisions approved by voters in a 2023 ballot initiative. Senate Bill 56 (SB 56), for instance, proposes limits on home cultivation, THC potency, and even public consumption of cannabis and maintains criminal exposure for certain types of violations. Additionally, SB 56 would impose a ban on people with felony convictions obtaining cannabis licenses, while also repealing the Cannabis Social Equity and Jobs Program, which was designed to provide support to individuals from communities adversely impacted by prior cannabis laws. This paradigm shift highlights how state legislatures wield power to amend even the most well-supported voter-approved policies.
In Nebraska, despite overwhelming voter support for medical cannabis in 2024, the path to full implementation has been marred by legal challenges. A lawsuit filed by former state senator John Kuehn, questioning the constitutionality of cannabis reform in the context of federal law, has led to continued uncertainty. The state’s Attorney General’s Office has also signaled that it may challenge the voter-approved measures, arguing that the federal prohibition on cannabis preempts Nebraska’s attempts at legalization.
Idaho has been even more proactive. In March 2025, the Idaho State Legislature passed House Joint Resolution 4 (HJR4), which would effectively prevent future cannabis legalization initiatives through direct democracy, granting the legislature sole authority over cannabis policy. If approved by voters in 2026, this resolution would restrict Idahoans’ ability to shape cannabis law via the ballot box. At the same time, the state has enacted harsh penalties for cannabis possession, including a mandatory minimum fine of $300 for possession of less than three ounces. This preemptive strike against cannabis reform highlights the challenges reformers face in deeply conservative states where cannabis remains highly stigmatized.
In many respects, the future of cannabis reform hinges on how states respond to the persistence of illegal markets. While enforcement is an essential component of any effective regulatory framework, heavy-handed criminal enforcement may still fail to resolve broader issues incentivizing unregulated markets to flourish. For example, addressing consumer behavior must be part of the solution. Many consumers may not fully understand the risks of purchasing from unlicensed sources—from health and safety concerns to the undermining of equity goals. State agencies should invest in public education campaigns that emphasize the benefits of the legal market and the broader social impact of consumer choices. By embracing smart, fair, and inclusive enforcement models, states can protect the integrity of their cannabis markets and deliver real benefits to the communities that need them most.
As to enforcement, compliance programs must promote coordinated, transparent, and equitable enforcement practices with industry stakeholders and state licensing agencies. By integrating data, public health guidance, and community input into enforcement planning, states can develop sophisticated methods to address unregulated sales without defaulting to broad sweeping re-criminalization. As legalization enters its second decade in many jurisdictions, this tension between social and criminal justice policy and regulatory oversight may define the next phase of cannabis law and policy.
Guillermo C. Artiles chairs McCarter & English’s government affairs practice and leads its cannabis group, where he helps businesses, investors, and individuals navigate a wide range of legal and regulatory issues. Prior to joining the firm, Artiles served as associate counsel to New Jersey Gov. Philip D. Murphy, working as front office counsel while the state embarked on an ambitious expansion of its medical marijuana program.
Ryan M. Magee, a partner with the firm, is a former prosecutor and seasoned trial lawyer. He has an active cannabis practice guiding businesses through license applications to cultivate, manufacture, and dispense medical and adult-use cannabis, as well as providing regulatory and compliance guidance for established cannabis operators.
Reprinted with permission from the May 12, 2025 edition of “The Legal Intelligencer” © 2025 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.