A budtender (right) shows cannabis buds to a customer at a dispensary in Desert Hot Springs, CA. / … [+] AFP PHOTO / Robyn Beck (Photo credit should read ROBYN BECK/AFP via Getty Images)
Cannabis businesses in the U.S. continue to struggle to break even—let alone become profitable—and a new survey illustrates the situation in terms of robust, data-driven numbers.
On Wednesday, Whitney Economics, a cannabis and hemp business consulting, data, and economic research firm based in Portland, Oregon, announced preliminary findings from its 2024 Cannabis Industry Business Conditions and Sentiment Survey showing an alarming trend: Only around one in four American cannabis businesses are profitable, relatively consistent with similar findings over the past two years, with some slight improvements.
Profitability of cannabis operators in 2022, 2023, and 2024.
Businesses across the country were surveyed in June, and analysts compiled data on the potential impact that the plan to reschedule cannabis to a less restrictive classification—Schedule III—would have on small and minority-owned businesses.
An average of 27.27% of U.S. cannabis businesses polled by Whitney Economics said they were profitable in 2024. A remaining 40.56% said they broke even, while 32.17% said they were not profitable. The number of businesses that were profitable in 2024 fell from 42.40% in 2022 but it represented a slight improvement from 2023, when just 24.55% of businesses polled said they were profitable. Analysts received responses from 28 state markets, showing a good representation throughout the country.
“What you’ve seeing is that operators are part of this culture that’s very malleable,” says Whitney Economics founder and Chief Economist Beau Whitney, who has worn hats as an operator, licensee, and analyst, studying the market for over 10 years. “And they’re very flexible in changing conditions, and they adapt to changing business conditions, banking conditions, tax conditions, regulatory conditions. They’re constantly changing and pivoting, and they have to pivot. Because if they don’t, they don’t survive,” he says. “And either they go back into the illicit market, or they lose not only their business, but their personal property, because there’s no federal bankruptcy protection.”
Whitney Economics founder and Chief Economist Beau Whitney.
The industry is also a minefield of risks. Whitney warns, for instance, of loans made with personal guarantees, with high interest, leading to almost predatory lending. “So when you fail in this industry, it’s not just business failures, it’s personal wealth destruction,” he says, and even though the industry is malleable, the regulatory and legislative processes are another story. He explained that legislators have been focused on public health and public safety instead of the health of the operators and the health of licensees. “And so by maintaining a tenural policy of public safety,” he says, they aren’t addressing the needs of licensees.
“Operators cannot make money, regardless of how much money they actually generate,” Whitney says. “And it’s evidenced by the fact that 27.3% are profitable, meaning 70% are either breaking even, or they’re losing money. About a third of them are losing money. That’s not a sustainable marketplace.”
High taxes are partially to blame for the low rate of profitability. According to the announcement, some cannabis businesses in the country are paying an effective tax rate of 52.5%. The proposal to reclassify cannabis would result in a lower tax burden and increase cash flows, the firm predicts.
Tax write-offs—perhaps transforming if cannabis is rescheduled—could change everything for cannabis businesses. Currently, tax code section 280E restrictions on cannabis businesses make it difficult to stay afloat.
“Unfortunately, many cannabis businesses continue to struggle financially as a result of the punitive tax measure known as IRC Section 280E as well as limited access to financial services,” says Michelle Rutter Friberg, director of government relations at the National Cannabis Industry Association (NCIA). “These businesses are compliant with state law and deserve to be treated like any other small business in America. The elimination of 280E is just one of the many reasons NCIA is supportive of the Biden Administration’s recent moves to reclassify marijuana as a Schedule III drug.”
How does this compare to small businesses in other sectors? According to the U.S. Chamber of Commerce, 65.3% of all small businesses in the U.S. are profitable, so the cannabis industry is far behind.
“Because of the scheduling machine, making a Schedule I drug, then you have a disproportionate tax taxation, you can’t take common business deductions in off your federal taxes,” says Whitney, who says that Whitney Economics does not take a stance on legislative efforts like the plan to reschedule cannabis. “And so even though states are allowing for common deductions, it doesn’t really make much difference because of the heavy burden at the federal tax level.”
Cannabis excess tax code section 280E taxation projections.
In 2024, the cannabis industry is forecasted to pay an additional $2.3 billion in excess taxes as a direct result of cannabis’s classification under Schedule I. Without any changes, this excess tax burden in expected to increase to $5.2 billion by 2030. Other reports from Whitney Economics show that deliquent payments are on the rise as U.S. cannabis businesses continue to struggle.
“When we look at the economic impacts when we when we sampled and surveyed business operators,” rescheduling would help, he says, “because they’re in such economic distress, and a lot of that money will go towards debt service, it will go towards paying delinquent accounts payable to others and then it also go to reducing their debt service because of high interest rates.”
How Did Minority-Owned Businesses Perform?
The initial findings were included in a Minority Cannabis Business Association (MCBA) submission to the Drug Enforcement Agency (DEA) on the impacts that the current scheduling policy is having on cannabis operators, particularly minority-owned or small businesses.
The survey results indicated that while on average 33.7% white operators in cannabis are profitable, just 17.5% of their non-white counterparts are profitable in 2024.
“Minority communities have been impacted disproportionately,” says Whitney. “And they continue to, despite the fact that all of these social equity programs, and what we discovered in our research is that they don’t measure the effect. And they don’t take measurements about the number of minority applicants, ownership, all this stuff. Some of it is because they just don’t want to. And some of it is because they’re not allowed. And so when we did a FOIA request on how many minority licenses they have. A lot of them say ‘we don’t collect data.’ Right now they’re not measuring it and as a result, the disproportionate cannabis policies impact those communities.”
Another issue is that states define minorities differently with overlapping communities.
The economic tax burden situation, for cannabis businesses and especially those owned by minorities, isn’t the job for any one entity, he says.
“Federal government must do A, B, and C and the state regulators must do X, Y, and Z,” he says. “What we’re saying is that something needs to be done because what’s going on right now is unsustainable.”
