Although marijuana stocks had a relatively poor 2018, the same can't be said for the overall marijuana movement. In fact, the cannabis industry arguably had its most impressive year ever.
In October, Canada became the first industrialized country in the world, and only the second overall behind Uruguay, to legalize adult-use pot. Ending nine decades of recreational weed prohibition completely legitimizes the marijuana industry, as well as rolls out the red carpet for what should be billions of dollars in added annual sales.
It was a similar story in the United States, where Missouri and Utah gave the green light to medical marijuana, and Vermont and Michigan legalized recreational cannabis. We also saw the U.S. Food and Drug Administration approve the very first cannabis-derived drug, and witnessed President Trump sign the Farm Bill into law in December. The Farm Bill legalizes hemp and hemp-based cannabidiol oil.
Yet, no matter how much validity the marijuana industry gains, it still remains illegal in the United States at the federal level. As a Schedule I substance, cannabis is wholly illegal, prone to abuse, and not recognized as having any medical benefits. Of course, one congressman is hoping to change marijuana's scheduling in the U.S.
Image source: Getty Images.
No joke: Marijuana bill numbered "420" was introduced in the House
This past Wednesday, Jan. 9, House Rep. Earl Blumenauer (D-Ore.) introduced a bill to remove marijuana from the controlled substances list and treat the drug like alcohol. The bill, known as the "Regulate Marijuana Like Alcohol Act," is numbered as "H.R. 420" in reference to 4/20 (April 20), which is known as a national holiday in cannabis culture.
Make no mistake about it, this isn't Rep. Blumenauer's first attempt at trying to make things right for the marijuana industry. He's the founder and co-chair of the Congressional Cannabis Caucus, and he's been a co-sponsor to the rider attached to every federal spending bill in recent years that disallows the Justice Department from using any federal funding to prosecute medical cannabis businesses operating in legal states.
In an interview with Willamette Week, Blumenauer said:
While the bill number may be a bit tongue-in-cheek, the issue is very serious. Our federal marijuana laws are outdated, out of touch, and have negatively impacted countless lives. Congress cannot continue to be out of touch with a movement that a growing majority of Americans support. It's time to end this senseless prohibition.
The support Rep. Blumenauer speaks to is the record 2 out of 3 Americans in Gallup's October 2018 poll who support national legalization, and the 93% of Americans in an April 2018 survey from the independent Quinnipiac University who favor allowing a physician to prescribe medical cannabis to patients.
Image source: Getty Images.
Understandably, there may be financial motivations for legalization as well. Blumenauer's home state of Oregon, one of the 10 adult-use-legal states, has struggled with oversupply. Unlike most states, which restrict the number of cultivation licenses issued, Oregon doesn't restrict the number of growing licenses it issues. The result has been rampant oversupply and falling per-gram prices. If cannabis were to be treated like alcohol, it would allow for the interstate transport of pot, thereby helping Oregon's oversupply problem.
However, change would be very much welcome for pot-based businesses that are already thriving in the United States. For example, KushCo Holdings (KSHB) provides packaging and branding solutions to the cannabis industry. Legalization would dramatically boost the number of growers that would need tamper- and child-resistant packaging that complies with federal regulations. But KushCo would also see a lift in its branding solutions business, which helps growers develop packaging and branding that allows them to stand out in an increasingly crowded field. Presumably, if other consumption options were legal, it would also fuel KushCo's hydrocarbon gas operations, which are crucial to the production of high-margin cannabis oils. In short, it'd be great news for KushCo.
There would also be plenty of cheers from cannabis real estate investment trusts, like Innovative Industrial Properties (IIPR 0.06%). Right now, Innovative Industrial owns 11 medical cannabis properties that were initially leased out for 15 to 20 years, and have annual rental increases and 1.5% management fees built in. If pot were legalized nationally, Innovative Industrial Properties, which is generating more than a 15% average annual return on its investments, would be free to expand into new states.
The point being that Americans and pot businesses are almost certainly behind Blumenauer's efforts to pass H.R. 420.
Image source: Getty Images.
A congressional buzzkill
But in reality, Blumenauer's bill is likely to go up in smoke. There's a very good chance it won't come to a vote -- and even if it did, House Democrats and/or Senate Republicans are unlikely to vote in favor of the measure.
With such strong support from the public, you're probably wondering why lawmakers on Capitol Hill continue to either dig in their heels on weed or ignore the issue completely. One reason is simply that marijuana isn't an important enough issue at the moment to cost elected officials their jobs. The same Quinnipiac poll referenced earlier, which found that 93% of Americans support medical marijuana prescriptions from a physician, also found that just 13% of respondents wouldn't vote for a candidate who didn't share their views on pot. Maintaining a negative or wait-and-see approach on marijuana isn't hurting politicians, and their views are unlikely to change until it could mean losing their elected seat.
Another problem is money. As a Schedule I substance, marijuana businesses in the U.S. are currently subject to U.S. tax code 280E. This nearly 37-year-old tax law disallows businesses that sell a federally illicit substance from taking normal corporate income tax deductions, save for cost of goods sold. In some instances, this can lead to an effective tax rate of between 70% and 90%. Removing pot from the controlled substances list would allow cannabis businesses to be taxed like normal businesses. While great for investors and the companies themselves, it would reduce the amount of taxable income collected by the federal government by $5 billion over the next decade. From a monetary perspective, there's no incentive to change marijuana's scheduling.
It's possible the 2020 elections could bring marijuana into the spotlight as political candidates look to win a seat on Capitol Hill or secure their seat for another term. But in 2019, marijuana bills look to have little traction in Washington.
Check out all our earnings call transcripts.
