Source: Flickr user Matthew Kenwrick.
As a resident of Washington state, I've witnessed some big changes over the past decade -- but perhaps none bigger than the legalization of marijuana on a recreation basis.
Why legalize?
Approved by voters in the Nov. 2012 elections, Washington state joined Colorado as the first two recreation-legal states in the country. Since then, Oregon and Alaska, along with Washington D.C., have joined in legalizing marijuana for recreational, adult-use purposes.
The legalization of marijuana for recreational and medical purposes is significant for Americans for a number of reasons, but those reasons differ depending on whom you ask.
Recreational users in the aforementioned states simply enjoy the freedom from state prosecution for purchasing and possessing legal amounts of marijuana. For the states, it's also a way of generating additional revenue through taxation of the drug. These funds can be used to cut budget deficits or handle other pressing state issues, such as maintaining infrastructure, bolstering education, or even creating or keeping jobs. Finally, medical marijuana users appreciate the ability to have access to a drug that's shown a number of benefits against select disease indications.
Marijuana businesses struggle in Washington
But getting the marijuana experiment off the ground hasn't been easy. The legal paperwork logjam and a black market for marijuana that existed long before it was ever legalized haven't allowed growers or legal marijuana shops in states like Washington to maximize their potential.
Source: Washington State Recreational Marijuana via Facebook.
There are also some head-scratching laws in Washington state that have truly hampered the sale of recreational marijuana. For example, Washington taxes marijuana growers and retail marijuana shops separately, meaning taxes could account for up to 75% of the price of the end product that reaches the consumer. This makes it very difficult for legal growers and businesses to compete with the black market, and it certainly disincentivizes new business growth. In fact, a CNBC report in February highlighted that an oversupply of marijuana in Washington state had created a glut of the drug. Could you have ever imagined that a state could suffer through a marijuana glut if the question were posed five years ago?
The good news is there could be a solution working its way through Washington's legislature that could cure its complicated tax code and potentially even serve as a model for the remainder of U.S. states -- that is, if lawmakers from both parties can come to an agreement.
How Washington could become even more marijuana-friendly
This solution, known as HB 2136, offers a number of steps to discourage black market producers and simplify the business for marijuana growers and retailers.
First, it would restructure the excise tax into a single tax that's collected by the retailers at the point of sale, rather than taxing growers and retailers separately. This would boost the current excise tax rate from 30% to 37%, but would eliminate the tax confusion currently plaguing growers and retailers.
Source: Washington Marijuana Association via Facebook.
It would also potentially sweeten the pot (pardon the pun) for cities and counties that are willing to let marijuana shops open by providing some degree of tax revenue sharing. Here's how it would work: Once Washington's General Fund had collected $25 million in marijuana excise tax revenue for the year, then either 30% of the remainder of the taxable revenue collected, or a maximum of $20 million per year, will be redistributed to cities and counties. Counties would receive 60% of the share, while cities would garner the remaining 40%. The bill also provides a guaranteed $12 million for distribution in 2016 and 2017 ($6 million per year) to cities and counties. The original bill had this arrangement going away in 2022, but a newer amendment would ensure this clause has no "end date."
HB 2136 would also allow cities to reduce certain "buffers" of where marijuana retailers can be located (they're still off limits within 1,000 feet of a school or playground), and it would allow the Washington Liquor Control Board to work with local law enforcement to step up enforcement on illegally grown or black market marijuana.
This bill recently moved into the Senate Ways and Means Committee and is slowly making progress toward possibly becoming a law.
Could this translate to nationwide success?
As both President Barack Obama and presidential candidate Hillary Clinton have stated, the four marijuana-legal states, including Washington, are ongoing experiments to see if marijuana can boost states' taxable revenue and help patients medically without leading to adverse social impacts, such as an increase in crime rates. These "experiments" will be critical for Congress should it take up the debate of whether to legalize medical marijuana, or perhaps even go so far as to decriminalize marijuana altogether by rescheduling the drug.
HB 2136 could also demonstrate to the states, both those with medical marijuana laws already on the books and those that don't have medical marijuana laws in place at the moment, an easy way to simplify their tax collection while attempting to minimize black market marijuana operations. Of course, only time is going to tell if HB 2136 is successful, if it's even approved by the Washington legislature in the first place.
Source: White House on Flickr.
Challenges remain
These experiments are going to take time. Just as the medical benefits and risks of marijuana are being analyzed in long-term trials, marijuana's social effects need to be examined for longer than a year or two. Even if HB 2136 passes, it's probably not going to be until the end of the decade before we can truly judge whether it's making a dent in reducing black market marijuana and boosting tax revenue.
Another concern is that government simply isn't making marijuana legislation a priority, which could make a nationwide legalization -- medical or recreational -- difficult to come by. President Obama has suggested America's youth focus on more pressing problems than marijuana, and has suggested that Congress would only be likely to take up the issue if more states joined in the recreational and/or medical marijuana experiment.
Altogether, these uncertainties still suggest that investing in most marijuana stocks is extremely risky and probably not a smart move. There's little denying the potential for the industry, and it's possible Washington state could be developing a replicable solution nationwide. But with legal roadblocks galore still in place on a federal level, and few certainties with laws differing on a state-by-state basis, I'm going to again opine that your smartest move is to keep your investable money as far away from the marijuana industry as possible.
