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Adequate Implementation, Not Additional Taxes, Key To Cannabis Social Equity Success

February 19, 2021 11:26 am
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Adequate Implementation, Not Additional Taxes, Key To Cannabis Social Equity Success

The calls for social equity in cannabis continue to grow louder as the market matures and more states come online. While most in the space support social equity, its implementation and the market's taxation has the sector debating the need for high taxes to fund equitable efforts.

The topic is far from new in cannabis. Michigan, one of the top-performing markets in the country, recently debated new sales taxes aimed at improving diversity and helping disadvantaged groups in the industry through millions in taxes raised.

New York, a state debating the prospect of adult use legalization once again, is discussing how much of its estimated $300 million in annual tax revenue to allocate to social reform.

Governor Andrew Cuomo has proposed that $100 million go towards communities most impacted by the war on drugs.

Those working in the space tell Benzinga that social equity is of the utmost importance, but questions and opposition to the high tax route exist.

Uncertain Of High Taxes As Key To Social Equity Success

SF Roots founder and CEO Morris Kelly believes enough tax is already being collected to support adequate equity programs. People tend to get turned off at the prospect of new taxes, but the endeavor is just in its effort to support companies that often don't receive fair access to capital.

Kelly calls for all states to track precisely where their tax revenue is going.

"Given the amount of taxes already collected in this industry, it shouldn't be impossible to set funds aside to support businesses without raising taxes," he says.

John Sullivan, EVP Government Affairs at Cresco Labs Inc. (OTCQX: CRLBF), also says access to funding is the most significant hurdle today.

Taxation, however, is not the key to remedying the matter, he explains.

"The solutions are tax reform, including fixing 280E, and ensuring that social equity applicants—and the industry as a whole—can engage the support of financial institutions through traditional loans," Sullivan tells Benzinga.

Peter Earle, a research fellow at the American Institute for Economic Research, also pushed back on taxation as a means to creating social equity, arguing that taxes affect lower income individuals most.

"Unless the taxes are earmarked for certain purposes, there's no guarantee that those taxes will necessarily be used for socially beneficial purposes," he says.

Numerous states have laid out where funding goes, with most setting aside revenue for equity programs, as well as drug education, environmental protection and law enforcement.

"If social equity is important, then the means by which it is achieved are important," Earle added. Instead, he supports providing a plethora of opportunities in the sector rather than "guaranteeing outcomes."

Cannabis Suffers Under 'Very High Taxes'

Ganja Goddess CEO Zachary Pitts says social equity has to focus on access to capital and industry connections in order to succeed.

Pitts doesn't see taxes resolving the capital access issues because the local and municipal governments often prioritize other concerns. At the same time, he does not see states being able to assess a viable business plan or entrepreneur.

"More importantly, however, is that cannabis already suffers under very high taxes," Pitts adds.

High taxes are often cited as factors in keeping the illicit market thriving while also deterring owners from entering the space.

Aiden Rafii, CEO of Euphoric Life, says the highest barriers to entry in the industry are taxes along with licensing fees, initial investments and marketing budgets–adding that his company is taxed at four different parts of the supply chain.

He took issue with the allocation of funds to law enforcement, an issue occurring on the city and county level as well.

"There is more money going into policing and enforcement than restitution," Rafii says.

Social Equity Parameters States Should Consider 
Like most of cannabis, there is no clear-cut answer to determining the best approach to achieving social equity.

Adam Hijazi, president of the cannabis group Long Beach Collective Association (LBCA), says many factors are needed to create a robust and scalable program.

Among several parameters, Hijazi cites scholarships and grants as key, with a thorough vetting process and city-led navigation during the planning and development of a business.

SF Roots' Kelly says programs should provide financial assistance as well as industry education to avoid entering the space without industry know-how.

"It's like giving someone who has never seen a car the keys to a Ferrari and asking them to win the Indy 500," Kelly says. "If we're not giving them the support they need, we're not setting them up for success."

Ganja Goddess' Pitts said governments looking for inspiration should look towards Oakland, California.

Calling the program the "gold standard" for social equity, Pitts commended the city for simple and straightforward regulations with city workers he described as flexible and supportive of a business trying to remain compliant.

"Once a cannabis social equity program is properly developed and successful, it should be able to scale to other industries and public sectors," Hijazi said.

Companies should do their part as well their means other than tax dollars. Sullivan said Cresco developed a business incubator program for Illinois entrepreneurs, adding that the model has plans to serve other markets as well.

He added that the program was conceived to provide both the technical and financial assistance needed for apply, opening, and operating a business in the market.

The company also works with external orgnaizations and stakeholders to participate and support events geared towards employment, expungement and other socially-focused community endeavors, including the company's recent involvement in the Racial Justice League.