The marijuana industry could be described as the fastest growing industry within the United States. Though there are numerous industries that have 20%-30% compound annual growth potential throughout the remainder of the decade, few can claim to have what's expected to be nearly 24% annual compounded growth potential over the next 10 years, according to investment firm Cowen & Co. By 2026, we could be talking about $50 billion in legal pot sales in the U.S.
A major shift in the public's opinion has been a key factor in the success of cannabis. Two decades ago, there was just a single state that had approved medical marijuana (California), and a mere 25% of Americans supported the idea of full legalization of pot. In fact, the War of Drugs was still in full swing in the mid-1990s.
Today, however, 28 states have legalized medical cannabis, and residents in eight states over the past four years have voted to allow recreational weed to be sold to adults ages 21 and up. This rapid ascent of legal marijuana comes as favorability toward a nationwide legalization has jumped all the way up to 60%, an all-time high. The favorability of medical marijuana is even higher, with six out of every seven Americans wanting to see it legalized nationally.
State and local governments are also mostly relishing the extra tax revenue that legal marijuana can bring. The approval of Prop 64 in California, the state's recreational marijuana initiative, is expected to generate an extra $1 billion in tax revenue per year. Meanwhile, Colorado took in $135 million in tax and licensing fee revenue in 2015, which it'll be putting toward schools, law enforcement, and drug abuse programs.
The inherent disadvantages of operating a pot business in the U.S.
Yet, for as good a run as marijuana has had over the past two decades, it remains marred by the fact that the U.S. Drug Enforcement Agency once again declined to reschedule the drug this past summer following two petitions to do so. In its ruling, the DEA cited a lack of understanding of the chemical make-up of cannabis, as well as insufficient safety and efficacy data in clinical trials, as reasons to keep the substance as schedule 1. Keeping pot's scheduling unchanged reaffirms the federal stance that it has no medical benefits and thus requires individual states to decide on whether or not to approve its recreational and/or medical use.
More importantly, the DEA's decision allowed two longstanding inherent disadvantages of the pot industry to continue: cannabis-based business are unable to take normal business tax deductions since they sell a federally illegal substance (meaning they pay income tax on their gross profits instead of net profits), and they almost universally have a difficult time accessing basic banking services, including checking accounts and/or lines of credit.
While it doesn't appear that the DEA will be reviewing marijuana's scheduling again anytime soon, Congress could help relieve a long-standing federal burden on the marijuana industry beginning in 2017.
Could banking soon become easier for cannabis companies?
As it stands now, roughly 3% of all banks in the U.S. are willing to work with marijuana-based business. At one end of the spectrum is a rapidly growing business that should have lenders and banks seeing green. But at the other end are a number of federal regulators that oversee the banking sector -- and the federal government still views weed as an illegal substance, regardless of what varying state laws say. At the end of the day, most banks are going to err on the side of caution and turn cannabis businesses away for fear of being prosecuted for money laundering. This leaves some pot businesses to deal entirely with cash, which is an expansionary inhibitor and a serious security problem.
However, certain lawmakers in Congress have been pushing for change. In 2015, the Marijuana Business Access to Banking Act, introduced by Ed Perlmutter (D-Co.) and Denny Heck (D-Wa.), would have prevented federal regulators from penalizing or preventing financial institutions from doing business with legal marijuana businesses. In particular, the Marijuana Business Access to Banking Act would have stripped the penalizing power of the Consumer Financial Protection Bureau, FDIC, Federal Reserve, and Office of the Comptroller and Currency. Bill sponsors Heck and Perlmutter wanted to see this common sense change made to protect legal pot business owners and employees who are forced to deal solely in cash. As you rightly surmised, Heck and Perlmutter's proposal didn't pass muster in Congress.
More recently, in June 2016, an amendment to the Fiscal Year 2017 Financial Services and General Government Appropriations Act, which would have banned the four aforementioned federal regulatory authorities from penalizing banks and financial institutions for doing business with legal marijuana companies, failed to pass in the House after narrowly passing in the Senate Appropriations Committee 16-14.
In spite of these failures, an incoming administration, coupled with Heck's and Permlutter's persistence (they've introduced similar legislation multiple times) and a growing number of legal marijuana states, could change this vote in 2017. President Obama has already given states workarounds they can implement to offer basic banking services to the marijuana industry, so the next logical step would be to remove the bigger hurdles that stand in the way of banks being able to serve the industry, as well as improve the safety of legal marijuana workers.
Legislation to make banking easier for the cannabis industry has gotten a little further along with each passing year, leading me to believe that change could be a strong possibility in 2017.
Keep this in mind
Assuming legislation is passed that allows financial institutions to deal with legal marijuana businesses, it could quickly open up new channels of revenue and boost deposits for financial institutions. For the pot industry, it would give businesses access to credit that could be used to facilitate new purchases and to expand. It would, in theory, be a win-win for both industries.
Unfortunately, even if banking access becomes easier for the marijuana industry, it's still not going to be very investment-worthy. Having to pay tax on gross profits instead of net profits is a big disadvantage that investors aren't going to like, and as long as the federal government maintains its schedule 1 stance on pot, big businesses are liable to keep away from entering the industry. Big businesses and industry consolidation would provide the best avenue to success for investors who want to take part in marijuana's rapid growth, but this pathway seems to be nothing but a pipedream at present.
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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