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A Shrinking Opportunity for Equity in the Weed-o-Sphere

The expanding legalization of marijuana sales is failing to give entrepreneurs from disadvantaged communities a chance to get into the cannabis business. Policymakers should take a new look at licensing, tax and other policies.

Marijuana dispensary in Portland, Ore. (Electric Lettuce)
On the election night in 2012 when Colorado became one of the first states to legalize the commercial sale of recreational marijuana, I was on the set of a Washington, D.C., television station. Behind the scenes, there were lots of jokes about making vacation plans for a Rocky Mountain high, and not the kind John Denver sang about.

Since then, weed shops have become big business, with sales in Colorado since the referendum totaling more than $10 billion. Experts are projecting that, nationally, legal sales of marijuana and cannabis-infused products are likely to reach $43 billion annually by 2025.

The business, however, has certainly not developed as many state and local leaders hoped, providing new entrepreneurial opportunities for those from disadvantaged communities. There’s no better case than that of Ryan Brown in Los Angeles. He is Black and from a lower-income neighborhood. And, like a disproportionately large number of people from similar backgrounds, he’s done prison time for selling weed. To help bring jobs to local residents, the city put 100 licenses for retail stores on the market, but just 11 of the applicants were Black, and Brown never made it past the first stage. Wealthy applicants or residents from gentrifying ZIP codes snapped up most of the licenses.

Brown's experience reflects deep, long-standing inequities. In federal prisons, 46 percent of all inmates are there for drug offenses, and while whites are more likely to sell illegal drugs, Blacks are far more likely to be arrested for it. The burgeoning marijuana business seemed an ideal way to balance this historic problem, to create both new, legal markets and prosperous community businesses.

Barriers for Would-Be Weed-Preneurs

At the state level, Massachusetts has led the effort to help minority applicants get marijuana licenses. The goal was to redress the historic imbalance. But so far, Politico reported, “it hasn’t worked.” Some cities simply didn’t want weed stores in their towns. Some applicants had a hard time finding the cash to open a store. And some found themselves not being able to afford “community impact fees,” where town officials required them to make big upfront payments in exchange for extra costs the town might incur. Of the 122 applicants who received "economic empowerment priority" in applying, just eight got a license.

In Boston, just to get into the game costs more than $1 million, counting the impact fee and the big capital requirements. Because weed continues to be illegal at the federal level, there’s little start-up capital readily available to small businesses. Banks just don’t want to touch operations that might jeopardize their charters.

As a result, “all the smaller operators have been getting pushed aside or being forced to sign agreements beyond the law,” complained one Boston applicant. More than 60 percent of the impact fees in Massachusetts went beyond state limits. U.S. Attorney Andrew Lelling impaneled a grand jury to investigate corruption in the issuance of local cannabis licenses. There’s a deep irony here: a federal grand jury stepping in to help license applicants selling a product that, under federal law, remains illegal.

Impact fees are just part of the challenge. For would-be weed-preneurs, there are often complicated regulations, such as where a store can be located — at least 1,000 feet away from schools, playgrounds, churches and scenic highways in Tacoma, Wash., for example. License application fees can be steep, ranging from $150 in Louisiana to $20,000 in New Jersey.

And because small-business borrowing for marijuana operations is so limited, anyone looking for a Michigan license to grow medical marijuana has to prove they have at least $150,000 in total assets. State regulators are worried that small, undercapitalized operations could find themselves going belly-up.

Then there are the taxes, which state and local governments see as a major boon to their budgets. One Washington state operator explained that there’s a 25 percent tax on the grower, and another 25 percent tax imposed on the processor. Add to that another 25 percent tax on the retailer, along with a combined 10 percent state and city sales tax. The feds insist that weed shop operators pay taxes as well, even though they’re operating a business that by federal standards is illegal. The federal government collects a 25 percent tax, and the IRS even has a handy guide to help small-business marijuana operators. Navigating the rules and taxes, of course, requires a lot of legal help, which adds to the expenses.

Locked Out of a Lucrative Business

Despite the obstacles, the legal-pot business is quickly expanding in a landscape in which 36 states now permit medical use of marijuana and 18 states and the District of Columbia have legalized recreational use. The trend toward legalization is certain to continue. After all, two-thirds of Americans favor legalization of the use of marijuana, including bipartisan majorities of every demographic except for those over the age of 75.

There’s enormous opportunity for further expansion. Less than half of all marijuana sales now come from legal dispensaries, and less than half of the population lives in states where consuming weed is legal — yet, anyway. But as business booms, smaller operators, especially among minority entrepreneurs, are being locked out of the lucrative business.

Minority executives now account for just 13 percent of executive positions in cannabis companies, and that’s down from 28 percent two years ago. (The share of women holding executive positions in the weed business is also low, at 22 percent, and is also dropping, from 37 percent two years ago.) Industry experts — and there now is such a thing, with how-to guides, business newsletters and trade associations — explain that this is because white male executives offer “established access to capital” in a business whose growth increasingly depends on it.

Much of that problem is due to business dynamics that would seem to be beyond the reach of state and local policymakers. But there is a role for them: They could take a fresh look at onerous licensing requirements, impact fees and tax structures that favor those with lots of capital and deep-wired connections. Otherwise, the odds of making good on an opportunity for increasing diversity in the weed-o-sphere are likely to shrink even more, leaving urban entrepreneurs outside the windows of the new pot stores looking in.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Donald F. Kettl is professor emeritus and former dean of the University of Maryland School of Public Policy. He is the co-author with William D. Eggers of Bridgebuilders: How Government Can Transcend Boundaries to Solve Big Problems.
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