What the Recent Cannabis Votes Mean to National Legalization

Despite marijuana remaining illegal at the federal level, the federal government under the last eight years of the Obama administration has maintained a generally hands off policy towards enforcement of cannabis laws as long as such activities are legal under state laws. For example, if a cannabis company in Colorado is is compliant with Colorado law then the feds generally left them alone (there were specific exceptions concerning matters such as not exporting to other states, keeping away from minors, and so forth). This approach allowed individual states to set their own courses for how they treat cannabis within their borders. States legalizing medical or recreational cannabis have essentially served "laboratories of democracy" showing the good and not-so-good of medical and recreational legalization.

The fact that Colorado has generated significant tax revenues, reduced arrests, and realized other social benefits all without the encountering the nightmarish scenarios predicted by cannabis prohibitionists (e.g., massive increases in pot consumption, driving under the influence accidents, and youth consumption to name a few), presents perhaps the strongest arguments possible in favor of legalization. Without a doubt it contributed to the successful recreational legalization outcomes in California, Massachusetts, Maine, and Nevada. 

In addition to these sometimes abstract statistical arguments, on a more personal level more and more people now know someone (or of someone) who uses marijuana for medicinal purposes, and many know people who consume it recreationally without any of the negative side effects claimed by prohibitionists. Because we now have 8 states that have legalized adult use (e.g., "recreational") and 28 that allow for medical marijuana, it's hard to imagine that these personal connections won't modify some voters' (and elected officials) opinions on future initiatives.  

A third trend propelling the legalization movement has been the increasing number of credible organizations joining cannabis stalwarts NORML, MPP, DPA, etc. in publicly supporting recreational use and / or medical cannabis legalization. In California, Prop 64 endorsers included the California Medical Association, United Farm Workers, and editorial boards for some of the state’s largest newspapers to name just a few. We are also seeing business owners from the industry begin to replace idealists as the drivers of the legalization movement. It is still a social justice movement but the legalization argument is now being buttressed (and increasingly financed) by a coalition of new marijuana business interests.

If the above trends weren't enough, demographic trends strongly favor legalization. In general, young adults overwhelmingly support legalization. Older voters, more conservative by nature, are proportionally against legalization. Due to the fact that every year another group of young people become of voting age while older existing voters pass on, every year more pro-cannabis voters are gained than lost even if no one changes their attitudes on legalization.

The result of all of this is that established media outlets such as the Economist are now proclaiming "The argument for the legalisation (sp) of cannabis has been won..." and the legalization discussion really does seem to have moved from "if" to "when." However, we live in a time where convention wisdom (and the predictions of pollsters) have gone out the window with surprising results including Brexit, the Columbian FARC vote, and pretty much everything associated with the most recent U.S. Presidential election. 

But what does this have to do with federal legalization, especially under a Trump presidency? It is important to remember that if the Trump administration continues the Obama administration's policy of leaving  the legalization decision (specifically enforcement) to the states but still keeping the Controlled Substances Act in place then the real issue of federal illegality has three primary manifestations:

  1. Tax.
  2. Banking.
  3. Interstate commerce.

1. Tax Implications of Federal Prohibition (Revenue Code 280E)

You probably know that an unintended quirk of tax law stemming from a largely symbolic change to the Revenue Code in the 1980s that aimed at meth and cocaine drug dealers is now keeping legal cannabis businesses from taking standard deductions. This change was never intended to apply to state legal cannabis businesses because it would be 14 years before there was such thing as a legal cannabis business. The reason this is rule is now being applied against legal dispensaries, growers and other cannabis businesses is because even state legal cannabis business are illegal in the eye of the federal government. Since the IRS collects federal taxes, 280E is applied to their federal returns thereby barring all normal business deductions other than cost of goods (since that is technically a reduction and not a deduction). The result of this is effective tax rates of 60-90%, a problem that only congress can fix. [Note: Some attorneys believe that 280E is vulnerable to being beaten in court so it's possible that a solution could come judicially. Stay tuned.]

2. Banking Implications of Federal Prohibition

As we wrote in our post on investment risks in the California cannabis market: "There are significant [banking] challenges for businesses that deal with cannabis. The Financial Crimes Enforcement Network ("FinCEN") puts onus on the banks to insure that their customers (and thus the source of those customers' deposits) are fully legal. The banks are expected to preform due diligence on their customers... Since there are harsh rules for violating these most banks don't want to take the risk by opening an account with a cannabis company." 

As with IRS 280e, it is within Congress' ability to address this banking problem. On one hand we have a Republican controlled Senate and Congress. While Republicans are generally less inclined to support legalization efforts they are more inclined than their Democratic counterparts to respect state's rights. Furthermore, marijuana reform is a bipartisan issue with many major Trump supporters also supporting legalization. In short, who knows which way this will go however if it drags on too long we can expect technology and entrepreneurs to figure something out (e.g., Bitcoin).

3. Interstate Commerce Implications of Federal Prohibition

By interstate commerce, we mean moving THC from one state to another. While business are free to conduct interstate business via licensing deals, franchising, and so forth, it is illegal for THC to be transferred across state lines. Unlike banking and 280e where all cannabis legal states have an interest in fixing them, interstate commerce isn't something that all states necessarily desire as they have a vested interest in protecting their local businesses from out-of-state competition. In truth, it may not be addressed for a very long time so we may continue to see national brands work via licensing / franchising mechanisms while sourcing THC products locally.

In summary, unless and until we get a better idea of what the Trump presidency means to federal cannabis policies, we can only guess what will happen to taxation, banking and interstate commerce. However, regardless of what Trump and his appointees want to do, it is likely that the forces pushing for liberalization of cannabis laws will continue through his presidency and the next. This will continue to add pressure on federal authorities to allow states set their own destiny and fix the vestiges of prohibition that go against the will of the people.

By: Wesley