It took the better part of a year, but the GOP and President Trump have their first major legislative win under their belts. Though healthcare reform failed on many accounts, tax reform has not. After some smoothing over, a reconciled tax bill between House Republicans and GOP Senators passed muster in Congress and won President Trump's signature to become law.
The new law, known as the Tax Cuts and Jobs Act, has two primary purposes: cut taxes, and simplify the tax code. For instance, individual taxpayers will find that some of the income ranges that correspond to a specific income-tax rate have been increased, while a few of the seven separate tax rates have been decreased. Also, the standard deduction for single and married tax filers has been nearly doubled, while a number of deductions and credits were eliminated.
Corporations might be an even bigger beneficiary. The Tax Cuts and Jobs Act lowers the peak marginal corporate income-tax rate form 35%, which is among the highest in the world, to just 21% on a permanent basis. The thesis here is that putting more money into the pockets of businesses will allow them to hire more workers, boost the wages of existing employees, and expand through reinvestment.
This industry won't be seeing green following the new tax law
However, not every industry is going to be able to take advantage of the new law. Marijuana companies that had been hoping for a reprieve from U.S. tax code 280E will continue to get the short end of the stick.
U.S. tax code 280E, which has been on the books for over three decades, states:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
In plainer English, because marijuana is still a Schedule I, and thus wholly illegal, drug at the federal level, pot businesses remain unable to take normal corporate income-tax deductions. That leaves businesses that are profitable to pay an effective tax rate of as much as 90% on their profits. This tax rate is especially crippling considering that Marijuana Business Daily's latest annual report forecasts legal U.S. sales growth of 45% in 2018.
Sen. Cory Gardner (R-Colo.) tried to make headway during the Senate's phase of tax discussions in early December. He submitted an amendment for discussion that would have removed marijuana businesses from the constraints associated with 280E, allowing them to be taxed like a normal business.
However, Gardner's amendment gained no traction and wasn't even voted on. Why? First, Republicans have a far more conservative view on the expansion of cannabis than do Democrats. The latest Gallup poll showed that just 51% support the idea of legalizing weed, which is still within the margin for error to be below the 50% line.
The other issue is that the Congressional Budget Office predicts that the tax law will add nearly $1.5 trillion to the federal deficit over the next 10 years. Essentially, the GOP needs every cent in tax revenue that it can get, which means continuing to tax cannabis businesses at well above the 15% to 30% marginal rate that most normal businesses pay.
Marijuana companies may actually face a double whammy
And that's not the end of it by any means for pot companies.
In addition to getting no reprieve in the GOP's legislation, Attorney General Jeff Sessions is waiting in the wings for any opportunity to pounce on medical-marijuana businesses operating in the 29 states that have legalized medical cannabis since 1996. Remember, this is an individual who believes that "good people don't smoke marijuana," and that medical cannabis isn't a proper way to deal with America's opioid crisis.
The only thing that's kept Sessions at bay is the Rohrabacher-Farr Amendment, which disallows the Justice Department from using federal dollars to prosecute medical cannabis businesses. However, in September, the House Rules Committee blocked a vote on renewing the Rohrabacher-Blumenauer Amendment (this is the same as the Rohrabacher-Farr Amendment, but with a different sponsor). Blocking this vote doesn't necessarily mean the amendment will be excluded in future federal budget discussions -- the Senate can always add it -- but it does remove one opportunity for medical-cannabis businesses to be protected. If neither GOP-controlled house of Congress adds the amendment to a longer-term federal spending bill, Sessions would be free to begin prosecuting pot businesses.
Sure, the pasture is looking greener for most corporations heading into 2018, but don't look for that same cheer among the marijuana industry.
The Motley Fool has a disclosure policy.