Cannabis and Economic Development?

Everyone loves to invest in a sure thing, the only challenge is finding one. And finding a new sure thing is even more difficult. This could not be truer when it comes to economic development and financing government and community needs. But what if governments were sitting on a sure thing?

In recent years as governments have struggled to generate sufficient resources to finance everything from critical infrastructure to public health, traditional revenue sources have become increasingly scarce. This is particularly true as domestic and international economies change to embrace new technology-based businesses, threatening government tax bases derived from traditional brick and mortar businesses, products, utilities and telecommunications.

Meanwhile much continues to be published about the ballooning revenue returns that state and local governments are reaping from licensing cannabis businesses. California took down roughly $1.3 billion in cannabis taxes last year, and early-adopting states with smaller populations like Colorado and Washington secured $424 million and $560 million respectively in 2021. (Bieber, 2022) In fact, to date 37 states, the District of Columbia and four U.S. territories have reformed their cannabis laws. As a result, these states are generating new and ample revenue they are dedicating to supporting infrastructure, public safety, health and education programming, and investments in underserved communities. And they aren’t the only ones.

Local governments are also welcoming new income from this unconventional source. For example, the City of Denver, CO, which recently expanded licensing to include consumption lounges, brought in $72.6 million in cannabis-based revenue in 2021, and $340 million since medical cannabis licensing began in 2010. (City of Denver, 2022) The City of Los Angeles, CA was expected to bring in over $80 million from taxing cannabis businesses in 2021 (Controller, Revenue Forecast Report for Fiscal Years 2020-2021, 2020), and Oklahoma City, OK, which only imposes a sales tax on cannabis, took in $6.45 million last year (Finance Department, 2022). The local tax revenue generated for these cities is used to support everything from the general fund to community services, education and facilities, and the quality of life for residents. 

While this is great news, the problem is that overwhelmingly, states and local governments do not factor cannabis into their jurisdiction’s economic equation. With cannabis laws now reformed across a super-majority of U.S. states and the District of Columbia, and over a decade of multi-state and local government policy reform on the books, when will cannabis be included in state, regional and local economic development plans?    

What is Economic Development?

The California Association of Local Economic Development (CALED) explains economic development as the creation of wealth from which community benefits are realized…more than a jobs program, an investment in growing economies & enhancing the prosperity and quality of life for all residents. The U.S. Economic Development Administration (EDA) defines the term similarly, and also holds as a core principle that long-term, sustainable economic development should be locally-driven. (Raimondo, 2020) Depending on a community’s unique needs and features economic development may include:

So economic development must be an ongoing core priority of local governments to keep local economies sustainable and communities prepared, healthy, competitive and safe – all with a focus on creating opportunity and improving residents’ quality of life.

Ok, But Cannabis and Economic Development? What are You Smoking?

Government attention to diverse and emerging business sectors is critical to maintaining a healthy long-term economy. According to the U.S. Chamber of Commerce, 50% of U.S. annual GDP growth is attributed to increases in innovation (Praxis Strategy Group, 2020). Just as federal, state and local governments have historically embraced support for emerging economic contributors such as manufacturing and technology, so should they embrace other innovative areas of commerce. Particularly those that are still developing with tremendous international market potential like cannabis.

For generations, advancements in industrial manufacturing supported continuous job creation and an increased standard of living for communities from New York to Kentucky. Recognizing their potential to contribute to long-term job growth and tax revenue, governments supported their growth through loans, grants and tax abatements, as well as education and skilled workforce training.

However, as the technology sector emerged in California, states that were once home to the rise of traditional industrial manufacturing saw it decline or move west, along with its economic impact and standard of living. Today this region is known as the rust belt. Meanwhile governments hosting technology sectors have formed regional workforce investment boards and state economic councils to ensure the powerful technology sector can continue to grow, thrive and be harmonized with other key sectors like manufacturing and agriculture. This ongoing engagement continues to deliver higher-wage jobs and an increased standard of living to communities across the state 

ROI on Innovation

The return on government support for innovative businesses goes beyond increased tax revenue, as new and unconventional businesses can yield increased activity in ancillary business areas. For example, the manufacturing and technology sectors boast 3:1 and 5:1 economic multipliers respectively, meaning that $3 in economic activity is generated for every $1 spent on manufacturing, and $5 of economic activity is generated for every $1 in spending on technology. Accompanying this activity is jobs, wages, business and individual tax collections, which support community needs ranging from education and health to public safety and infrastructure. Leading cannabis economist Beau Whitney of Whitney Economics estimates that the economic multiplier for cannabis is equivalent to that of manufacturing at roughly 3:1. (Whitney, 2022)

And the legal cannabis industry is growing rapidly. A February 2022 Leafly and Whitney Economics Jobs Report revealed that the legal cannabis industry supports nearly 430,000 positions, and that the industry produced about 280 jobs every day in 2021. (Leafly, Whitney 2022) According to the report that is a 33% increase from 2020 and marks the fifth year in a row that cannabis industry jobs have increased by at least 27%. And these jobs range in skill level and type in fields covering agriculture, processing and manufacturing, science and technology, distribution and retail. Projections for future industry growth remain bullish, with cannabis analytics firm New Frontier estimated a legal market size ranging from $57 billion to $72 billion by 2030. (Data, 2022)

[1] https://www.leafly.com/news/industry/cannabis-jobs-report;[2] https://www.prnewswire.com/news-releases/us-adds-tech-jobs-new-businesses-in-the-face-of-pandemic-challenges-comptia-state-of-the-tech-workforce-report-reveals-301512601.html;[3] https://www.bls.gov/emp/tables/employment-by-major-industry-sector.htm;[4] Whitney Economics;[5] https://www.bls.gov/ooh/computer-and-information-technology/home.htm;[6] https://www.bls.gov/emp/tables/employment-by-major-industry-sector.htm;[7] Whitney Economics;[8]  https://www.theforage.com/blog/careers/is-technology-good-career-path;[9] https://www.bls.gov/emp/tables/employment-by-major-industry-sector.htm

Complacence vs Resilience

In order to thrive, governments and communities must be willing to consider new contributors to economic development, and be resilient to unforeseen events. In fact, a 2022 U.S. EDA and CALED report (Development U. E., 2022) on economic disaster preparedness and recovery cites the need for economic diversification as a key measurement of resiliency. The ongoing global impact of COVID coupled with an ever-increasing rate of natural disasters only emphasizes this need. And while not included in resiliency plans, in 2020, 33 states with permissive cannabis laws included cannabis in their designations of essential businesses to remain operating during the health crisis. Further, many of these states expanded the reach of their cannabis businesses by allowing new capabilities such as delivery and curb-side pickup. The result? Revenue. The state of Illinois alone took down $1.3 billion in cannabis revenue in 2020. (Channick, 2022)  The state of Washington saw its cannabis tax revenue increase by 29% from 2019 to 2020, bringing in $614 million in year one of the pandemic. (Project, 2022) 

And state governments are not the sole beneficiaries of these policies. Returning to the 2022 U.S. ED and CALED report, the resiliency playbook acknowledges the City of Needles, CA for its planning and leadership in leaning into cannabis policy reform to transform its economy. Needles’ revenue has grown from $6 million in 2019 to $11.1 million in 2021, with cannabis taxes accounting for 45-50%. (Henderson, 2022) So, in addition to traditional businesses and economic drivers, why not consider cannabis in long-term economic development planning? 

Silent Contributor

For California and the 482 cities and 58 counties within its borders, this should be a no-brainer. California has long been considered the home of the largest cannabis marketplace in the entire world, with Los Angeles at its epicenter. Industry analysts predict North American, European and Asia Pacific legal cannabis markets will reach a value of roughly $90 billion by 2030. Yet annual reports issued by the Los Angeles Economic Development Corporation since California’s legal adult-use market opened in 2018 make no mention of the legal cannabis industry’s contribution to regional or local job growth, tax revenue or role in economic resiliency. So what’s the holdup? 

Cannabis + Grant Programs = Increased Economic Development $

An important element of successful economic development is inclusiveness, which is currently in high demand from federal and state grant administering agencies. For example, if you were one of the 21 economic development coalitions who secured grant dollars under the EDA’s $1 billion Build Back Better Regional Challenge, equitable economic growth was a cornerstone of your application. Funding under the program is being steered to “106 counties that are home to largely underserved populations, 236 counties that are fully rural, and 136 persistent poverty counties.” (Administration, 2022)  

Meanwhile the State of California’s $65 million Community Economic Resilience Fund (CERF) program (Development C. G., 2022) announced in May of this year maintains similar tenants, seeking to support equitable economic recovery as state residents grapple with ongoing challenges from COVID and inflation. And equitable planning is only the beginning.  Successful applicants under this program will be awarded $5 million to help grant awardees put these new and inclusive plans to work.   

As cannabis reform expands across the country, state and local regulators are also embracing inclusiveness and providing grant funding to help support cannabis businesses owned and operated by members of disadvantaged communities. From 2019-2021 the California Governor’s Office of Business & Economic Development (GOBIZ) has made $1.67 million available in Equity Grants. Funding from these grants can be used by local governments to organize cannabis equity business licensing, and offer technical assistance and low or no-interest loans to equity cannabis businesses.

And many other states have adopted similar programs including Nevada, New York, Illinois, Arizona, Michigan and Massachusetts to name a few. Including cannabis in economic development has the potential to reach and impact disadvantaged communities in unprecedented ways as the industry’s roots began and still are bound to the legacy market.

With equitable economic growth tied to so closely to available government grant funding for local development and cannabis policy implementation, doesn’t it make sense to start merging these conversations for the benefit of state, regional and local economic development planning? 

Education: The More You Know

A consistent challenge since states began reforming their cannabis laws in earnest in 2012 has been a lack of local government participation in licensing cannabis businesses, particularly retailers. Unfortunately, most local governments lack the resources to address this policy area while also grappling with traditional issues like housing and infrastructure development, and public health and safety. In fact the lion’s share of California resources made available to local governments from cannabis reform has gone to cities and counties to help them build and maintain cannabis business licensing programs.

And while only about 25% of California local governments have licensed legal cannabis retailers, a sufficient volume of local governments large and small have organized reforms over the past six years to offer lessons in key economic development areas such as zoning, land-use, revenue, taxation and licensing approaches. 

For example, acknowledging the costly regulatory burdens faced by these businesses, local governments are already making changes to their cannabis tax regimes, reducing them significantly while still taking down sizeable tax hauls. In 2019 the City of Long Beach reduced gross receipts taxes on supply-side cannabis businesses from 6% to 1%, and rather than experiencing a staff-predicted cannabis revenue decline to $4 million the city collected $10.3 million. (News, 2021)

Local governments are also using lessons learned from their early policy adopting colleagues on zoning and land-use and balanced licensing, by taking advantage of general plan updates to introduce new cannabis business zones, license retailers and move them from industrial zones to traditional retail areas. Thereby making them accessible to consumers who are accustomed to shopping for everything from groceries and prescriptions to home repair and sporting goods in one convenient location. 

So, How Do I Include Legal Cannabis in My Economic Development Planning?

National associations of local government are collaborating with leading economic and policy firms to offer guidance to governments that will optimize cannabis reform outcomes across public health and safety, revenue and tax, and community prosperity.

The Government Finance Officers Association (GFOA) has partnered with the International City/County Management Association (ICMA), the National League of Cities (NLC) and other key organizations to provide approaches to modernizing revenue streams called Rethinking Revenue (Association, 2022). The effort explores new resource options in our changing economy and is now working with Square Root Group and Whitney Economics to provide economic and policy analysis related to cannabis reform.

Many of the criteria described in this report are supported by smart cannabis regulation. Let’s consider just a few examples:

As the table above illustrates, there is an opportunity to improve local government revenue systems and make communities better places to live for everyone with smarter cannabis regulation.

The bottom line is local governments can step outside the box and into the greenhouse when rethinking their next economic development plan. Understanding how to properly legalize, license, zone and tax cannabis will enable states, cities and counties to implement an economic development plan that is strong and resilient. After all, what could your city or state do with $1.3 billion? We’re confident the answer is worth the investment.

About Square Root Group, LLC

Square Root Group collects and analyzes data from policies implemented across the country to help state and local governments improve approaches to cannabis revenue and tax, zoning and land-use and licensing policy. This data-driven approach provides governments and their associations with the information, education and tools necessary to build effective policy that will support state reform goals. Square Root Group, LLC is excited to share an unprecedented and complete approach to improving cannabis policy at every level of government. Through economic and policy analysis of new and existing markets, proposed legislative & regulatory changes, and reviews of key market and policy deficiencies, we offer holistic solutions that benefits all stakeholders. To learn more contact: info@squarerootgroup.com and visit squarerootgroup.com.

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