States Keep Repeating the Same Mistake With Marijuana Legalization

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In the 50 years since President Richard Nixon initiated the war on drugs, politicians of both major parties have endorsed aggressive police tactics and harsh punishments to combat substance abuse, and minority communities have disproportionately suffered. Black Americans are several times more likely than whites to be arrested for low-level marijuana offenses, despite comparable usage rates. Now with federal marijuana legalization a real possibility, and the drug war widely regarded as a failure, one of the central questions is how to compensate its victims.

New York and New Jersey’s new cannabis laws aim to create paths for entrepreneurs of color to join the industry. Within the cannabis world, this concept is known as “equity.” In theory, it promises an elegant symmetry: Massive demand for cannabis will pump money into the communities most damaged by drug-war tactics. In recent years, however, as marijuana legalization has made headway state by state, numerous jurisdictions have implemented similar plans with only token success. The people running and profiting from legal cannabis are overwhelmingly rich white guys, and without drastic changes, it’s likely to stay that way.

WIth everyone stressed and stuck at home, 2020 was a very good year for the weed business. Legal cannabis sales jumped roughly 50 percent to $18 billion. Only 15 or so states have substantial marijuana markets but they generated almost as much revenue from pot sales as Netflix did globally. Cannabis is arguably the country’s fastest growing industry. Sales will more than double by 2025.

Legalization has delivered a measure of justice. In legal states, arrests for nonviolent cannabis offenses have generally plummeted. And some have created programs to expunge criminal records for minor pot-related offenses. (Having a record can block access to student loans, public housing, jobs, and other opportunities. Whether equity benefits extend to those with past cannabis convictions varies from state to state.)

Efforts to support minority-owned cannabis businesses haven’t gone as well. Despite extraordinary demand for the product, it’s very difficult to run a profitable cannabis company. State regulations and the complications associated with federal illegality create hurdles and costs that don’t exist in other industries.

Increasingly, a group of larger companies known as multistate operators, or MSOs, dominate the industry. While still small compared with, say, liquor companies, the largest MSOs have dozens of stores and hundreds of millions in annual revenue. Leading MSOs such as CuraleafCresco Labs, and Columbia Care have raised money by going public in Canada.

Left behind are mom-and-pop entrepreneurs, including those who could benefit from equity programs. In the mainstream economy, entrepreneurs of color often struggle to access capital, but in the cannabis world, the entire industry is locked out of the financial system. Some banks are willing to quietly work with pot companies and charge them high fees, but smaller businesses can’t afford this option.

For several years, legal-weed jurisdictions have tried to support equity businesses by prioritizing them for licenses, various forms of financial support, and other benefits. The approach, which New York and New Jersey are generally following, hasn’t worked, and as the MSOs expand, the odds grow slimmer that they will. (New Jersey’s market could open in a few months, while New Yorkers probably have to wait until 2022. In the meantime, recreational marijuana use has now been decriminalized in both states.)

Cities and states lack the resources and expertise to support small businesses competing against the MSOs. It would seem absurd for a state government to help small-time entrepreneurs compete against Starbucks or Pepsi, but that’s essentially what they propose for cannabis. New Jersey hopes to reserve 25 percent of licenses for residents of “impact zones,” but awarding the licenses to disadvantaged entrepreneurs is not the same as enabling them to compete against far larger and better capitalized companies.

The preferences inherent to these efforts also attract legal challenges. In marquee markets like Los Angeles and Illinois, lawsuits filed by aspiring licensees have effectively halted the rollout of equity programs, as larger companies gobble up market share.

Further complicating matters, each legal state has had to craft its own cannabis regulations. Politicians and regulators don’t necessarily understand that the equity provisions they’re supporting aren’t going to work. And they have other concerns, like keeping pot away from kids.

In these situations, the MSOs and their lobbyists are happy to step in with recommendations for how markets should be structured. And they present a reassuringly bland corporate face to wary lawmakers. In Illinois, Democratic Gov. J.B. Pritzker boasted that he signed the country’s “most equity-centric” cannabis law. In practice, the market functions as what a Chicago investment banker described to me as a “state-mandated oligopoly.” Regulatory decisions such as limiting the number of licenses, charging high fees to applicants, and setting aside “microbusiness” licenses for equity companies go a long way to determine who participates and succeeds in a market. Whether or not it’s the intention, state laws pick winners by amplifying big companies’ advantages.

The MSOs aren’t inherently opposed to equity. On social media, many of them strike a woke pose, just like the giant companies they aspire to be. Far fewer have committed substantial resources to diversity within the industry or their own organizations.

If cannabis is going to steer wealth into the communities ravaged by the war on drugs, MSOs probably have to be enlisted in the effort. The available evidence suggests these companies aren’t sold on the value of diversity. States could change that by structuring their laws in ways that acknowledge the difficulties equity entrepreneurs have encountered thus far. They could incentivize, for example, MSOs to create executive training programs or invest in equity businesses. Another possibility is for MSOs to franchise or license their brands, like fast food restaurants and hotels, creating entry points for individual entrepreneurs.

Seventeen states have legalized marijuana and dozens more allow some form of medical use. In coming weeks, Senate Majority Leader Chuck Schumer is expected to release a bill to federally legalize, or at least decriminalize, cannabis. He and his co-drafters, Sens. Ron Wyden and Cory Booker, have repeatedly indicated that the bill will make restitutions for the war on drugs. It’s not clear whether they will prioritize the needs of equity entrepreneurs (or whether such a bill could pass the Senate).

Steve DeAngelo, an activist and executive who’s sometimes called the father of legal cannabis, likes to talk about how cannabis has the potential to be “a different kind of industry,” one with more humane values than are typically ascribed to major corporations. That will only happen if well-crafted laws force it do so. If they don’t, cannabis will look a lot like every other industry.

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