The Cannabis Equity Con

Seth Perlman/AP Image

Marijuana grows at the Ataraxia medical marijuana cultivation center in Albion, Illinois. 

On June 25, Illinois became the 11th state to legalize marijuana. Governor J.B. Pritzker claims what really sets Illinois’s law apart is that it is the “most equity-centric” legalization law yet. According to Democratic state Representative Jehan Gordon-Booth, this means that “the communities that have suffered through the war on drugs will now have an opportunity to enter a new market and be successful.” This vision of equity, though, is based on a deeply flawed understanding of what a mature legal marijuana market will look like.

The law establishes a social equity applicant status for license applications. Applicants with this status, which include people from low-income communities and communities of color, will receive an advantage in the marijuana licensing process, and reduced fees. There will also be $30 million in low-interest loans available to defray startup costs for certain dispensaries.

This vision of equity is based on the assumption that, post-legalization, there will be huge sums of legally generated revenue from selling marijuana. Based on this premise, lawmakers think the state should ensure that members of marginalized groups are among those reaping these large rewards. The problem, however, is there will soon be no money to spread around.

There is currently a mini–gold rush under way, as marijuana businesses exploit the pent-up demand for legal weed. Small businesses are also succeeding because marijuana remains illegal under federal law—the risk premium has kept many large companies from entering the space. But this gold rush will not last. Weed, frankly, grows like a weed. Once marijuana is fully legal and the industry is properly industrialized, it should be incredibly cheap; the only question is when this will happen.

In Oregon, marijuana has only been legal for a few years, and the prices are already starting to crash. The state is sitting on over six times as much marijuana as it needs, which has sent state lawmakers scrambling to find ways to get rid of it all by approving its exportation.

To get a sense of legal marijuana’s value, it’s worth considering hops. Hops is probably the closest legal agricultural product to marijuana in terms of genetics, farming style, harvesting, and processing. While illegal marijuana retails for around $300 an ounce, quality hops retails for around $2 to $3 an ounce. This is likely how much fully legal marijuana would sell for if it were subject to no special taxes or regulations. Even with generous consumption estimates, that puts the entire American retail market for marijuana flower at around $1 billion, which is roughly what we spend at the grocery store on spices and just a fourth of what we spend on chewing gum.

There is this idea that, if marijuana were legalized, the tens of billions spent in an illicit market would instead flow through a legal market. But the main impact of unrestricted legalization would be that marijuana consumers would keep most of what they had been spending—in other words, prices would be much lower. The only reason marijuana spending could remain high is that there are real public-health reasons for preventing marijuana from becoming as cheap as basil or oregano.

So should the benefits of government-inflated marijuana prices go to the general public, or to a small handful of lucky private-business owners?

The government has many tools to make legal marijuana sell at several times the price that it would otherwise. This value is entirely a product of government action—not business behavior. But depending on how the government artificially inflates prices, the revenue generated will go either directly to the state or to individual business owners.

First, the government could directly collect this income via government-run stores, high taxes, or high annual licensing renewal fees. If the government wants, it can directly employ individuals from specific groups in its marijuana state monopoly or use the funds for direct job programs in victimized areas.

Alternatively, the government can raise prices by letting a small number of lucky rent-seekers keep the billions, via regulatory scarcity and the granting of permanent licenses to the few people lucky enough to apply early. For example, in a state like Illinois, the number of marijuana businesses needed to service the entire state could easily be 1,000 or fewer. Even if half of the state’s licenses went to people from traditionally marginalized groups, that is still just a few hundred individuals.

From any perspective on equity, ensuring that any excess spending goes to underfunded public schools or public programs targeted at communities most impacted by the drug war is far better than ensuring more diversity among a few thousand private entities whose entire value is based on government largesse.

This idea that just getting a marijuana license should be a sure ticket to success can have dangerous implications for the future. These plans are encouraging “social equity applicants” with minimal business experience to take out large loans to enter an unstable market likely to experience precipitous price drops, rapid upheaval, and massive competition from major corporate players once the federal prohibition ends—all with unpredictable timelines.

Already, venture capital in cannabis-related businesses reached nearly $1 billion in 2018, and mergers hit $15 billion. Once federal legalization takes place, it’s unlikely small growing operations and retailers in a state like Illinois will be able to compete with better-established growing operations in Oregon, which are already waiting to expand, or with sophisticated international beer conglomerates like Molson Coors, which is preparing to move into the industry.

The recent Supreme Court ruling in Tennessee Wine & Spirits Retailers Association v. Thomas will make it much more difficult for the state to protect its local small licenses when national legalization happens. Under the ruling, large chains of alcohol businesses can move into states without abiding by certain regulatory restrictions, chipping away at the 21st Amendment. It’s easy to see how this could eventually apply to state marijuana licenses, even ones designed to foster social equity.

Instead of admitting their original vision is flawed, I fear states like Illinois will try to bail out these particular individuals and the rest of the industry by capping licenses and making the existing ones a tradable asset. This would divert revenue that could be going to the government or regular consumers to a small set of private rent-seekers, effectively replicating the problem that plagued the New York taxi medallion system. Even under this best-case scenario, a few hundred lucky individuals will benefit from selling their licenses to investment groups.

The equity question around marijuana shouldn’t be how we fairly decide which small groups of private individuals get rich off legal marijuana, but how we ensure no one gets rich. The legalization of marijuana will bring with it the modern farming and production techniques that will drop the actual cost of growing cannabis to a tiny fraction of what people currently pay. Combined with the relatively tiny amount of marijuana the country will actually consume—compared to most agricultural products—the market will barely be worth fighting over unless the government takes explicit action to keep the price high. The most equitable solution is to ensure the government captures all of this excess spending for public programs in underserved communities, or at least let cannabis consumers keep the benefits. The government deciding to give consumers’ money to a few thousand lucky license winners, even if it is a relatively diverse group, is a poor attempt at equity.

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