This is turning out to be a groundbreaking year for the legal cannabis industry.
Canada is less than eight weeks away from waving the proverbial green flag on recreational marijuana. Beginning Oct. 17, the floodgates will open and Canadian growers expect to reap billions of dollars in the years to come.
Across the investment landscape, we've witnessed a handful of pot stocks that had been listed on the over-the-counter exchange move up to the more reputable New York Stock Exchange or Nasdaq.
And in the United States, residents of the traditionally conservative state of Oklahoma recently voted in favor of legalizing medical marijuana. In doing so, Oklahoma becomes the 30th state to have passed sweeping medical cannabis legislation. Nine of these 30 states have also given the green light to adult-use pot.
Progress is at a standstill on Capitol Hill
Yet for as far as the cannabis industry has come, time has seemingly stood still on Capitol Hill, where U.S. lawmakers continue to hold firm on marijuana's classification as a Schedule I drug. As a reminder, Schedule I drugs are completely illegal, are considered highly prone to abuse, and have no recognized medical benefits. According to the Controlled Substances Act (CSA), marijuana sits side by side with heroin and LSD, while cocaine is a slightly less restrictive Schedule II substance.
As you can imagine, this scheduling can cause a lot of problems for marijuana businesses in the United States. As an example, pot businesses that earn a profit may have to pay an effective tax rate of as much as 70% to 90%. That's because businesses that sell a federally illicit substance (as defined by the CSA) aren't allowed to take normal corporate income tax deductions (aside from cost of goods) under Section 280E of the U.S. tax code.
Marijuana businesses also have little or no access to basic banking services. Even though the federal government has kept a hands-off approach to state-level legalization, federal law is what matters to financial institutions. This means offering a line of credit, or even something as simple as a checking account, could land them in hot water.
The American public is keen on cannabis
But if you were to ask the American public about marijuana, they'd prefer to see politicians change their tune.
In June, the Center for American Progress (CAP), a progressive public policy research and advocacy group, in partnership with GBA Strategies, released the results of a 1,000-person survey on cannabis perception. The poll showed that 68% of respondents supported legalization when asked, "Do you support or oppose the legalization of marijuana?" This includes 40% who "strongly support" legalization, and 28% who "somewhat support" it. No prior survey had ever surpassed the 64% support mark that was observed in Gallup's October 2017 poll.
Of course, the wording of the question, CAP's left-leaning tendencies, and margin of error can play in a role in impacting the final survey results. Nevertheless, no survey has ever demonstrated the support for legalization as high as that of CAP's.
What's also noteworthy is that when broken down into various demographics that included political preference, gender, and race, a majority of every demographic supported legalization. This includes the 57% of self-identified Republicans who responded that they were in favor of seeing pot legalized. Republicans traditionally have a more negative view on cannabis than Democrats or independents, so this finding is important -- especially with Republicans currently controlling the legislative branch of the federal government.
Federal change could be painfully slow
During the latter part of Barack Obama's presidency, he suggested that if more states were to legalize or decriminalize the drug and prove to lawmakers on Capitol Hill that the industry can be safely regulated, it could get the attention of Congress and lead to real change. Unfortunately, more than three years after those statements, little progress has been made.
One of the biggest hurdles to overcome is the strong likelihood that the federal government can reap more from overtaxing marijuana companies under 280E than if the drug were legalized and businesses were allowed to take normal corporate income tax deductions. Considering the steep annual budget deficit being run by the federal government, giving up annual revenue could be a tough sell.
The medical marijuana research Catch-22 could also get in the way. Lawmakers want to see well-defined studies on the risks and benefits of marijuana, yet running these studies has been practically impossible due to regulatory red tape and federal cannabis supply constraints.
If anything has a chance to convince lawmakers to change their minds, it's a newly approved drug by the U.S. Food and Drug Administration (FDA), and not the public.
On June 25, the FDA gave the thumbs-up to GW Pharmaceuticals' (NASDAQ:GWPH) Epidiolex, a cannabidiol (CBD)-based oral solution to treat two rare types of childhood-onset epilepsy. Aside from the fact that this was GW Pharmaceuticals' biggest approval to date, and the first medicine given the green light to treat Dravet syndrome, it's the fact that Epidiolex is the first cannabis-derived drug to gain approval that's really notable. CBD is the non-psychoactive cannabinoid of the cannabis plant best known for its perceived medical benefits.
Since Schedule I substances have no recognized medical benefits, and GW Pharmaceuticals' lead cannabinoid-based drug has verifiable medical benefits, it creates something of a cannabis conundrum for lawmakers. This approval could force lawmakers to, at the very least, retool their position on CBD, if not for marijuana as a whole.
It's clearly going to be an uphill battle, and growing support from the public just may not be enough to get federal lawmakers to change their minds.