Politics
Cannabis Could End Up Looking Like Big Pharma If Federal Rescheduling Leaves Social Equity Operators Behind (Op-Ed)
“Rescheduling should not become another step toward building a lucrative market that leaves that promise behind.”
By Sasha Nutgent, Housing Works Cannabis Co
Federal cannabis policy is beginning to change, but the benefits are not reaching every cannabis operator equally.
In April, the federal government moved qualifying state-licensed medical cannabis from Schedule I of the Controlled Substances Act (CSA) Schedule III, while licensed adult-use operators are still waiting for comparable federal reform.
That split could shape which businesses have the resources to compete as the industry evolves.
For companies with qualifying medical cannabis operations, the change will provide meaningful tax relief, while independent adult-use operators and especially social equity license holders continue to navigate the challenging cannabis industry without relief.
Social equity programs were created to help correct the harms of prohibition by giving people disproportionately affected by the War on Drugs a pathway into the legal market. In many states, they were the first license holders and worked tirelessly to define the market as we know it today.
However, as cannabis moves closer to the pharmaceutical and mainstream business worlds, those operators are more vulnerable than ever and the original purpose of creating a regulated market deserves attention.
As federal policy evolves, preserving the opportunity those programs promised requires more than awarding licenses, it really requires giving operators a realistic chance to keep their businesses and benefit from their success.
A two-track transition
The biggest piece of rescheduling is Section 280E of the federal tax code, which prevents businesses operating in Schedule I or II controlled substances from deducting ordinary business expenses. For cannabis businesses, this can mean paying taxes on income that does not reflect actual operating profits.
The federal government’s April action moved qualifying state-licensed medical cannabis into Schedule III, allowing eligible businesses to escape Section 280E’s restrictions. Adult-use cannabis remains in a separate position while broader rescheduling is considered.
If rescheduling doesn’t come to the adult-use market, this creates a two-track industry. Companies with qualifying medical operations may gain financial breathing room while adult-use businesses continue to face a tax burden that makes profitability difficult.
Tax savings can support hiring, facilities, expansion and acquisitions. Smaller operators already struggling to cover rent, payroll and inventory have fewer options for weathering a downturn.
The people legalization was meant to prioritize
Social equity applicants were not simply another group competing for business licenses. They were prioritized because cannabis prohibition imposed disproportionate costs on them and their communities.
In New York, the Conditional Adult-Use Retail Dispensary (CAURD) program created a jumpstart for qualifying justice-involved individuals and other eligible applicants to enter the regulated adult-use market for the first four years.
Receiving a license is only the first hurdle. Entrepreneurs must navigate permitting and compliance, secure a location, finance construction, hire staff and buy inventory. These costs can reach millions of dollars before a dispensary opens. Staying open brings another challenge: retailers compete in a crowded market where brand recognition, purchasing power and access to capital can determine who survives, while rent, payroll, inventory, taxes and debt continue to accumulate when revenue falls short.
States can count licenses issued and stores opened without knowing whether entrepreneurs are building sustainable businesses, retaining control or accumulating wealth. Many were ill-equipped to run such complex enterprises, some closed their doors less than five years after starting while others took partnerships that did not serve their success.
If social equity programs were meant to help correct the economic harms of prohibition, their success must be measured long after a license is awarded.
When opportunity changes hands
Partnerships with established companies can provide capital, real estate and operational expertise, but not every partnership delivers equal value.
An entrepreneur may hold a social equity license while having limited control over decisions, shouldering significant financial obligations or receiving a small share of profits. Initial funding may help a dispensary open, but without ongoing support and a fair share of the upside, the owner may struggle to build lasting wealth.
The risks intensify when a business struggles. An operator facing mounting debt or declining sales may need to sell a business, its assets or its interest in a licensed location. A better-capitalized buyer may acquire those assets for pennies on the dollar, while the original license holder has lost their life savings.
Not every acquisition is predatory, and a sale can provide a necessary exit for an entrepreneur. The concern is what happens when financial pressure leaves an owner with few viable alternatives. The person prioritized to help correct the harms of prohibition may ultimately lose the business they worked to build, while a larger company gains a foothold in the market.
If medical rescheduling improves the financial position of some operators while adult-use social equity businesses remain under pressure, the imbalance could compound an already uneven playing field.
Make equity part of the policy
Policymakers should evaluate rescheduling by who can access its benefits, alongside its effects on research, investment and corporate finances. Congress should address the continued application of Section 280E to state-licensed adult-use businesses, including the equity operators states explicitly sought to prioritize.
States should measure long-term outcomes for social equity businesses, including survival rates, debt burdens, ownership changes and whether license holders retain meaningful control. Licensing programs should provide ongoing access to affordable financing, accounting, human resources, compliance guidance, marketing and operational expertise. Partnership agreements should clearly disclose fees, financial obligations, decision-making authority and profit distribution.
If they don’t, then the industry that was supposed to correct the wrongs created by the War on Drugs may end up becoming just another sector of big pharma.
Cannabis may be moving toward a more mainstream future, with greater investment, pharmaceutical research and consolidation. None of those developments has to come at the expense of social equity. If the people prioritized because of the War on Drugs cannot retain ownership, build wealth and benefit from the market they helped establish, we must be honest about what legalization has accomplished and what remains unfinished.
The promise was never simply to legalize cannabis. It was to create a fairer industry in the process. Rescheduling should not become another step toward building a lucrative market that leaves that promise behind.
Sasha Nutgent is the VP of Cannabis Retail for Housing Works Cannabis Co, the first licensed adult-use and only 100 percent charity dispensary in the state of New York.
Photo courtesy of Philip Steffan.
