Marijuana has expanded like a weed over the past two decades, but 2016 could be its greatest year yet.
In November, residents in up to a dozen states could vote on whether or not to legalize medicinal or recreational marijuana. Five states have secured marijuana initiatives on their ballots, while signature collection and verification continues in the remaining states.
California is one state where a marijuana vote is going to happen, and the cannabis industry couldn't be more excited about it. California is one of the largest economies in the world, and recreational legalization would mean a major bump in tax revenue and licensing fees for the state. Additionally, legalizing the recreational use of marijuana in a state as large as California would add validity to the fast-growing industry, and it could encourage Congress to take another look at legalizing marijuana.
In total, since California first passed a Compassionate Use law for medicinal marijuana in 1996, two dozen additional states have legalized medical marijuana. Four states, along with Washington, D.C., have legalized recreational marijuana since 2012. After the first week of November we could be seriously adding to these totals.
Lawmakers stand firm on marijuana
Of course, Capitol Hill has other ideas. The federal government has stood as a brick wall in the way of the marijuana industry for decades, and even with state-level approvals gaining steam, lawmakers have shown no sign of letting up on their view of marijuana being an illicit substance. As we've seen previously, keeping the marijuana plant as a schedule 1 substance (i.e., a highly addictive substance with no medical benefits) places cannabis-based businesses at a marked disadvantage to normal businesses.
For instance, cannabis-based companies are, in many cases, forced to deal solely in cash because banks want nothing to do with marijuana. The reasoning is that bank deposits are insured by the federal government, and allowing cannabis companies to open checking accounts and gain access to lines of credit could be construed as money laundering. Only about 3% of banks nationwide are currently dealing with the marijuana industry. This means cannabis companies are coping with the added security concerns of using cash and are slowed in their efforts to expand and hire without access to credit.
Another issue that cannabis businesses face that any normal company doesn't can be found come tax time. U.S. tax code 280E disallows businesses that sell illegal substances from taking normal business deductions on their federal corporate income tax filing. This leads to marijuana companies paying tax on their gross profits instead of net profits, meaning they're forking over well more than they should to the federal government.
At the center of lawmakers' concerns is the long-term safety of the drug, as well as what might happen to adolescent-use rates if it were to be legalized. However, newly released data from the 2015 Healthy Kids Colorado Survey could prove to be a game-changer for lawmakers concerned about adolescent safety and drug access.
This study could be pivotal in changing lawmakers' minds
According to the survey, adolescent marijuana use hasn't shot higher as some pundits had predicted following the legalization of recreational marijuana in the state in 2012. If anything, marijuana use has been on the decline among adolescents over the past six years.
In 2009, 43% of Colorado adolescents had used marijuana at least once in their lifetimes. By 2013, a year after Colorado legalized marijuana but prior to the opening of dispensaries retailing legal recreational marijuana, only 37% of middle school and high school students admitted to ever having tried marijuana. In this latest study of approximately 17,000 middle school and high school students, which includes 2014 and 2015 data, 38% admitted to trying marijuana at least once.
A similar trend was seen in occasional-use adolescents, defined as those who had used the drug within the past 30 days. A quarter of teens surveyed admitted to cannabis use within the past month in 2009. By comparison, only 20% admitted to using marijuana within the past month in 2013, and just 21% did so in the latest study. The national average of monthly marijuana use among adolescents is 21.7%, meaning Colorado is slightly below to more or less in-line with the national average despite selling legal recreational marijuana since Jan. 1, 2014.
Although fewer teens view marijuana as risky compared to 2013 (48% now vs. 54% in 2013), and it remains the second most used substance (over students' lifetimes) behind only alcohol, this survey from Colorado certainly suggests that creating a regulated, but legal, marijuana market nationwide may not lead to the surge in marijuana use among adolescents that skeptics have feared.
Change could be around the corner, courtesy of the DEA
Making matters even more exciting for supporters of the marijuana movement, the U.S. Drug Enforcement Agency is on the precipice of a major ruling within the next couple of weeks that could wind up with a rescheduling, or de-scheduling, of marijuana for medical purposes. The Food and Drug Administration has already released its findings to the DEA, and now the DEA is undertaking is own research into the potentially addictive qualities of marijuana.
If the DEA were to completely de-schedule marijuana, it would be treated just as alcohol and tobacco are. A rescheduling to anything between a schedule 2 and schedule 5 would legalize medical marijuana throughout all 50 states. However, it would also, in effect, turn the cannabis industry into a pharmaceutical industry. The FDA would tightly regulate marijuana's production, as well as the packaging and labeling of the product. More importantly, marijuana businesses would need to substantiate claims of medical benefits by performing potentially costly clinical trials that the FDA could then validate.
There are a lot of positive and negative ways to construe this upcoming DEA decision.
Wait and see
With this new survey data from Colorado, a DEA ruling in a matter of weeks, and the upcoming November elections that could radically alter the state-level legal landscape, investors could be champing at the bit for their piece of the marijuana industry. For those investors I'd strongly suggest a wait-and-see approach.
For example, a DEA decision to reschedule marijuana could just as easily be bad for the industry. Federally legal medical marijuana, but with tighter regulations, could lead to higher costs and lower margins for cannabis-based business. In fact, it could be downright difficult for smaller players in the business to survive.
State-level legalizations this November also offer no guarantee that Congress will even consider legalizing marijuana. President Barack Obama has suggested that the best way to get the attention of Congress is to keep legalizing at the state level, but lawmakers may elect to take a longer wait-and-see period approach. Currently, Colorado, Washington, and Oregon are the full-legalization "guinea pigs" that Congress is closely watching.
There may indeed come a time when marijuana makes for a suitable buy-and-hold investment, but I don't believe we're anywhere near that point yet. Until we see discernable progress at the federal level, I'd suggest keeping your investing money far away from cannabis.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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