Earlier this month, we witnessed another step in the cannabis revolution. Marijuana legalization initiatives made the ballot in five states, and residents passed each measure with ease. This included South Dakota, which made history by becoming the first state to jump from completely illegal to medically and recreationally legal in one night.
By the end of election night, there were now 36 states that had waved the green flag on medical marijuana, 15 of which also allow for the consumption and/or retail sale of recreational pot. You could rightly say the green rush is alive and well in the United States.
The American public wants to see a green wave sweep across the country
We're also witnessing a dramatic shift in how the public views cannabis. For more than 50 years, national pollster Gallup has released sentiment surveys that ask respondents if they want to see marijuana legalized nationally. Between the mid-1970s and mid-1990s, support for legalization hovered around 25%. But following California's groundbreaking move in 1996 to legalize medical marijuana, enthusiasm and support for broad-based legalization has been heading steadily higher.
On Nov. 9, Gallup released the results of its 2020 survey, which showed that an all-time record 68% of polled adults favor legalizing weed nationwide. If we assume that Gallup's polling results would hold true across the entire adult population in the U.S., we're talking about 173.58 million people who want weed legalized.
Interestingly, all age groups now favor legalization -- even when taking the survey's margin of error in to account. Although younger age groups are still far likelier to favor legalization than older Americans, a surprisingly high 55% of seniors aged 65 and over believe it should be made legal. Other analyzed categories, such as gender, education, and household income also showed broad-based support.
The lone variances in support that Gallup found (albeit still within the margin of error) were people who identified as Republican (48% support for legalization) and individuals who attended weekly religious services (48% support).
If support is overwhelming, why isn't cannabis legal at the federal level?
You might be asking why, if 173.6 million Americans want marijuana to be a legalized drug, hasn't Washington, D.C., abided by this overwhelming support and legalized pot? The answer to that question can be boiled down to three factors.
First of all, there's no support for legalization in the Oval Office. Momentum was never strong enough to consider federal legalization when Barack Obama was president. Meanwhile, sitting President Donald Trump appears opposed to the idea of recreational legalization. Though President-elect Joe Biden has proposed decriminalizing and rescheduling cannabis from Schedule I to Schedule II, he, too, remains opposed to the idea of broad-based legalization.
A second issue is that Republicans aren't all that enthused about the prospect of giving weed a thumbs-up. As the Gallup poll noted, 48% of surveyed Republicans favored legalization, which is actually down three percentage points from 51% in the 2019 Gallup survey. And even if Republican lawmakers would entertain the possibility of federal legalization, Senate Majority Leader Mitch McConnell (R-Ky.) won't allow marijuana bills to reach the Senate floor for vote. Unseating Republicans as the majority in the Senate would be the only viable pathway to federal legalization.
The third reason we're not seeing a strong push for legalization on Capitol Hill has to do with money. As long as weed remains a federally illicit substance, businesses that sell cannabis products are going to be subjected to Section 280E of the U.S. tax code. Implemented in 1982, this tax code disallows pot companies from taking normal corporate income tax deductions, save for cost of goods sold. This leads to exceptionally high effective tax rates, but a handsome payday for the federal government. Legalizing cannabis would mean saying goodbye to billions in marijuana income tax revenue each decade.
Inefficiencies aside, multistate operators are in a position to thrive
With little hope of federal legalization in the immediate future, you might be under the impression that U.S. pot stocks would struggle -- but that couldn't be further from the truth.
There's no question that legalization would remove some of the inefficiencies multistate operators (MSO) have been forced to contend with. This includes a lack of access to basic financial services from banks and credit unions, as well as the inability to transport cannabis across state lines. Yet, these challenges have proved to be small potatoes with legalized weed sales catapulting higher in legalized states.
Green Thumb Industries (GTBIF 0.68%) and Trulieve Cannabis (TCNNF -5.15%) are both quickly proving how successful the vertically integrated MSO model can be.
Green Thumb has nearly 50 operational dispensaries nationwide, and has been pushing aggressively into Illinois and Nevada via acquisitions. Illinois should be generating over $1 billion in sales by 2024, with Nevada responsible for the highest per-capita cannabis spending in the country by mid-decade. It also doesn't hurt that roughly two-thirds of Green Thumb's sales are derived from high-margin derivatives, such as edibles, vapes, and infused beverages.
Meanwhile, Trulieve Cannabis has taken single-state focus to an entirely new level. Even though it has a presence in about a half-dozen states, 67 of its 72 operational dispensaries are located in medical marijuana-legal Florida. By saturating the Sunshine State, Trulieve has been able to effectively build up its brand, minimize its marketing costs, and gobble up half the state's pot sales. It's currently the most nominally profitable pot stock in North America.
These MSOs and ancillary players don't need federal legalization to deliver serious returns for investors.