Ready or not, the marijuana industry could be reshaping right in front of our eyes.
Over the past 20 years we've seen incredible growth in the legal marijuana business. Starting with the passage of a compassionate use law in California in 1996 for medical patients, medical marijuana has become available in half of all U.S. states. Since 2012, four states -- Washington, Colorado, Oregon, and Alaska -- along with Washington, D.C., have passed laws allowing for the legal sale of recreational marijuana to adults aged 21 and up. Based on data from cannabis research firm ArcView, legal marijuana sales hit an estimated $5.4 billion in 2015, and legal sales could grow at an average of 30% per year through 2020.
Yet all of this could be just the tip of the iceberg.
These states are vying to legalize recreational marijuana
The November elections could wind up having a dramatic influence on the marijuana industry. Though there were plenty of state movements that fell short of the required votes or grassroots support to get a marijuana initiative on the ballot, residents in nine states will be voting on whether to give marijuana the thumbs up or thumbs down this fall.
Specifically, five states are vying to legalize recreational marijuana, which would more than double the current legal-state total in one year. Here are the votes that will matter most come November.
Without question, the crown jewel of the marijuana movement would be a victory in California. California has the largest economy among U.S. states by a mile, and if it were a stand-alone country it would represent the eighth-largest annual GDP in the world. Gaining recreational marijuana approval in California would give the industry access to a huge population of potential users, as well as give Congress the ultimate in marijuana guinea pigs to monitor.
For the state itself, marijuana would create a new source of revenue generation, which would probably be a good thing for a state that always seems to be running in the red. Estimates have suggested that legalizing adult-use marijuana could lead to an additional $1 billion in tax and licensing fees for the state.
The prospect of legalization looks good in California, although nothing can be set in stone just yet. A poll conducted in May by the Public Policy Institute of California (PPIC) found that 60% of voters favored recreational legalization, compared to just 37% who opposed the initiative. PPIC conducted a similar poll last year (even without a marijuana initiative on the table) and found the issue a lot closer, with 54% in favor of recreational legalization and 44% opposed.
Among the nine states set to vote on marijuana this fall, residents of Nevada were the first to know they had an initiative on the 2016 ballot. Nevada is already home to "Sin City" and a vast network of medical marijuana dispensaries, making a move to legalize recreational marijuana only natural. If Question 2, as the ballot measure is know, is approved, recreational cannabis in Nevada would be subject to a 15% wholesale tax. The revenue generated from this tax would predominantly be shuffled into the K-12 education budget.
While it would seem likely that Nevada residents would also legalize recreational marijuana, let's not forget that Oregon, a state known for its pot infrastructure, failed to pass a recreational marijuana initiative in 2012 on its first go-around. An informal poll offered by the Las Vegas Review-Journal showed 88% support for recreational marijuana's legalization, but only time will tell if this strong support will hold.
Maine was among the earliest states to note that residents would have the opportunity to vote on a marijuana initiative this November. The move isn't surprising given that Maine legalized medical cannabis in 1999, becoming the sixth state in the U.S. to legalize the substance for certain medical ailments.
But will recreational marijuana pass in Maine? Signs are cautiously pointing toward "yes" thus far, but as always anything could happen. A May poll from the Marijuana Policy Project (MPP) showed that 55% of respondents were in favor of seeing recreational marijuana legalized, as opposed to 41% who were against the idea. However, when MPP asked respondents how they felt about taxing and regulating marijuana, regardless of how they felt about it, 59% favored the idea of taxing and regulating the substance.
If approved, the first $30 million in tax revenue collected would go toward school construction, with the remainder heading into the state's General Fund. Also, the number of marijuana stores and cultivators would be capped until 2019 and 2022, respectively, if the Maine Marijuana Legalization initiative passes.
Massachusetts is where we really see the possibility for an initiative to fail.
Although Massachusetts gathered more than enough signatures to get a recreational cannabis question on the ballot, mixed polling has shown that approval could be an uphill battle. In May, a Suffolk University/Boston Globe poll found that 43% of respondents favored legalizing recreational marijuana, while 46% opposed it. A July 2014 poll from the Boston Globe found a similar mixed bag, with 48% of respondents favoring legalization and 47% opposing it. While well within the margin for error, these figures aren't comforting for industry supporters.
If approved, Massachusetts would require consumer to pay the state a 6.25% tax, plus a 3.75% excise tax. Local taxes could also be imposed, up to 2%. ArcView estimates that the legal recreational market could lead to $300 million in sales by 2018, with sales tripling to approximately $900 million by 2020. Inclusive of Massachusetts' medical marijuana market, we could be looking at a nearly $1.2 billion legal marijuana industry in the state by 2020.
Perhaps the biggest longshot of all is Arizona, which also collected enough signatures to get a recreational cannabis ballot initiative in front of voters this fall.
A recently released poll from O.H. Predictive Insights showed that a mere 39% of Arizonans support the idea of recreational cannabis compared to 52.5% who oppose it. Another 8.5% of polled people remained undecided. According to Mike Noble, the managing partner of O.H. Predictive Insights, older Americans tend to be more conservative in their views of marijuana, and in Arizona older Americans appear more likely to vote, thus dooming the initiative to failure.
If an about-face were possible, passage of Arizona's legal cannabis initiative would impose a 15% tax on marijuana sales, with the majority of proceeds going to the education and healthcare fields.
Expansion is not a guarantee of success
Though the dynamics of the industry are on the precipice of potentially big changes, the investable nature of marijuana still appears quite risky.
State-level expansion would certainly boost the size of the legal market, especially if California comes on board. However, it still doesn't guarantee investors a way to participate. Most investable marijuana companies are penny stocks that are trading on the over-the-counter exchanges where getting up-to-date and accurate information isn't always easy.
The industry needs definitive change on Capitol Hill to become investable -- but even then there are no guarantees of success for investors. For now, I'd continue to watch the evolution of the marijuana industry from the sidelines.