The cannabis industry is both figuratively and literally budding before our eyes. Over the previous four years, global sales for the pot industry more than tripled from $3.4 billion to $10.9 billion, according to the State of the Legal Cannabis Markets report from Arcview Market Research and BDS Analytics. By 2024, worldwide sales are expected to surpass $40 billion -- and this doesn't include cannabinoid-based pharmaceutical revenue and general retail stores that are selling cannabinoid products.
A big reason cannabis sales have soared has to do with 33 U.S. states having legalized medical marijuana or recreational pot. The United States is the crown jewel of the marijuana market, with most Wall Street forecasts and independent projections suggesting that the U.S. will account for anywhere from a third to more than half of all sales.
And at the heart of this sales growth is a persistent shift in the public's opinion on pot.
Support for legalizing marijuana is at a record high
According to each and every major national poll taken over the past year, Americans overwhelmingly approve of the idea of legalizing marijuana at the national level. National pollster Gallup, which has been conducting its survey on the American's perception of cannabis for 50 years, found in October 2018 that a record 66% of Americans were in favor of legalization. This jibes with polls undertaken by Pew Research Center, CBS News, and the independent Quinnipiac University, which showed respective support for legalization of 62%, 65%, and 60%.
And yet, marijuana firmly remains a Schedule I substance at the federal level. In layman's terms, this means it's an entirely illegal drug that's on par with LSD and heroin, is prone to abuse, and isn't recognized as having any medical benefits. In fact, cocaine has a more lenient classification (Schedule II) than cannabis.
If the American public overwhelmingly favors legalization, and elected officials are supposed to represent the will of the people, you're probably wondering why cannabis hasn't been rescheduled or completely removed from the controlled substances list by now. The answer boils down to five factors.
1. It's a money thing
Whether you realize it or not, one of the under-the-radar reasons lawmakers aren't incented to legalize or reschedule cannabis has to do with money.
Under the current law, marijuana-based businesses in the U.S. are subjected to Section 280E of the U.S. tax code. This portion of the tax code was implemented in the early 1980s to prevent illicit drug smugglers from writing off their business expenses on their taxes. According to this section of the tax code, cannabis businesses are disallowed from taxing any normal corporate operating deductions, save for cost of goods sold. If a pot business is profitable, this can lead to an effective tax rate that hits 70% to 90%.
In other words, the federal government is generating icing on the cake by being able to tax profitable cannabis companies in the U.S. at a legally exorbitant rate. If marijuana were suddenly legalized, pot businesses would be able to take corporate deductions available to so-called "normal" companies. This would cost the federal government an estimated $5 billion in tax revenue over the next decade.
2. It's partisan
Legalization is also, clearly, somewhat of a partisan issue.
According to Gallup's Oct. 2018 survey, a record number of self-identified Democrats, Independents, and Republicans, were in favor of legalization. However, there's a pretty gap in favorability between America's leading parties. For instance, 75% of Democrats and 71% of Independents would like to see cannabis legal across the country. Comparatively, a mere 53% of Republicans were in favor of legalization. That's a problem considering that Republicans currently control the Oval Office and the Senate.
Now, I know what you're probably thinking: "Isn't 53% a majority?" While it is a nominal majority, you should understand that other studies haven't corroborated with Gallup's findings in this respect. While it's undeniable that there's been a softening in the GOP's dislike of marijuana over the past decade, there's also a very clear divide on Capitol Hill between Democrats and Republicans on what the future should look like for the legal pot industry.
3. It's procedural
Although it's easy to overlook, a third reason marijuana hasn't been legalized in the U.S. is procedural aspects in Congress. To put a name to it: Mitch McConnell (R-Ky.) is the Senate majority leader.
It's not just that Republicans have been historically more averse to marijuana than Democrats or independents. As Senate majority leader, McConnell has some pretty big say over what bills make it to the Senate floor for vote. In pretty much each and every instance where a marijuana industry reform rider was motioned to be attached to a larger bill, McConnell denied the move.
For example, last December, McConnell denied efforts by Sen. Cory Garder (R-Colo.) to attach the States Act as an amendment to the First Step Act, a criminal justice reform bill. The States Act would have protected individual states' rights from the possibility of federal intervention. Put simply, as long as McConnell is Senate majority leader, cannabis reform riders and standalone bills are probably dead in the water.
4. It's not a major issue
Another very real problem cannabis enthusiasts need to come to terms with is that marijuana isn't an important issue on Capitol Hill, even though the industry could create jobs and lead to a notable economic trickle-down impact.
Right now, lawmakers are focused on things like coming up with a trade deal with China, crafting a federal budget that works, and creating a better health plan for the American public. Cannabis reform, while popular among the public, just isn't that high on the list for lawmakers in Washington, D.C., and it's liable to remain that way for some time.
What's more, surveys from Quinnipiac University have also shown that marijuana isn't a polarizing issue, as of yet. More specifically, just one out of eight voters would switch their vote if their preferred candidate didn't have a cannabis view that aligned with their own. This suggests that politicians can maintain an unpopular view on pot without fear of losing their elected seat in Congress.
5. It's a safety concern
Lastly, there are pretty obvious concerns about the long-term safety of marijuana use among lawmakers in Washington.
On one hand, cannabis overdoses led to exactly zero deaths in 2018. By comparison, opioid-related overdoses are killing more than 47,000 people a year. This isn't to say marijuana is a substitute for prescription opioids in every indication, but the data would appear to suggest the marijuana is a considerably safer substance than certain drugs already on pharmacy shelves.
On the other hand, health concerns have cropped up. As of last week, the Centers for Disease Control and Prevention had identified 805 confirmed and probable cases of vape-related lung illnesses that led to 12 patient deaths. In many of these cases, the users have confirmed that they used a tetrahydrocannabinol (THC)-containing substance in their vape device. THC being the cannabinoid that gets users high. There are clear reservations on Capitol Hill about marijuana's safety.
Canadian pot stocks are stuck in limbo
From an investment standpoint, the federal government's resistance to reform hasn't been a backbreaking deterrent for U.S.-focused pot stocks. Although it's meant that multistate operators have had to set up redundant operations in each state, given that marijuana can't be transported between states, it hasn't impacted the ability for some MSOs to be profitable.
The U.S. federal government keeping marijuana classified as a Schedule I drug is far more damning to Canadian pot stocks, such as Canopy Growth (NYSE:CGC) and HEXO (NYSE:HEXO). With both Canopy and HEXO being listed on the New York Stock Exchange, neither company can partake in the U.S. weed industry as long as it remains federally illicit, otherwise they could lose their listing status. For the time being, the best either company can do is enter the hemp market and sell cannabidiol (CBD) products, CBD being the cannabinoid best known for its perceived medical benefits that doesn't get users high.
Canopy Growth is spending about $150 million on a hemp-processing facility after being awarded a hemp processing license in New York State in January. Meanwhile, HEXO plans to enter eight states via its HEXO USA subsidiary with CBD products in 2020. While the hemp market does offer a means for Canadian pot stocks to place valuable infrastructure on U.S. soil, it could be a long time before Canadian marijuana stocks have any shot at generating significant sales from marijuana's crown jewel.