Image source: Flickr user Manuel.

When it comes to hot-button issues, there's perhaps none bigger than marijuana.

The case for legalization
Viewed just two decades prior as a drug with minimal public appeal, marijuana is now viewed favorably by respondents (albeit by a slim margin) in pretty much all national polls. When examining just the concept of medical marijuana, favorability jumps considerably higher, as evidenced by a number of independent polls in swing states.

Since California first legalized medical marijuana in 1996, 22 additional states have joined in, allowing certain patients with terminal, serious, and/or chronic illnesses access to cannabis. Beginning in 2012, residents of Washington state and Colorado voted to approve a recreational marijuana initiative. These states have since been followed by Oregon and Alaska in 2014, and the upcoming election in 2016 could feature between a half-dozen and a dozen states voting on whether or not to legalize recreational marijuana.

When it comes to legalization for consumers, the reason behind their support often varies. Some want access to marijuana's potential therapeutic benefits, whereas others simply want the federal government out of their business. The reasoning for states, though, is crystal clear: money.

Legalizing marijuana offers a new avenue of revenue for states that doesn't involve increasing taxes on all residents. The only parties taxed are those who want to grow, process, sell, or buy marijuana. Marijuana tax revenue isn't going to be a game-changer by any means in terms of narrowing large budget deficits -- NerdWallet has suggested nationwide legalization would result in $3.1 billion in tax revenue generation per year -- but it does provide certain facets of state-level budgets, such as education and law enforcement, with much needed capital.

Image source: Colorado Marijuana Enforcement Division. 

Colorado's marijuana industry generates big numbers
Since Colorado was the first state to officially sell recreational marijuana (recreational sales in Washington didn't kick off until the summer of 2014), it's often the go-to state to analyze in terms of growth and feasibility. With one month still left to be reported for fiscal 2015, it's looking very likely that Colorado will deliver substantial year-over-year sales and tax revenue growth.

First, based on the latest data from November provided by the Colorado Marijuana Enforcement Division (CMED), medical marijuana and retail marijuana sales are on pace to total more than $900 million in 2015. For some context, pot sales in 2014 for Colorado totaled just $573 million, meaning we're on pace to see well over 50% year-over-year growth.

Image source: Flickr user Cannabis Culture.

What's truly remarkable about Colorado's rapid growth is that legalization within the state is still very mixed. Even though residents of the state voted to legalize recreational marijuana in November 2012, it was still up to each individual jurisdiction to decide whether or not to allow retailers to set up shop. Around three-quarters of all Colorado jurisdictions sent marijuana retailers back from whence they came, so we're talking about potentially $900 million-plus in sales from just a handful of cities.

The other big number, also based on CMED data through November 2015, is that Colorado looks to be on pace for more than $80 million in tax revenue in 2015. CMED data from the entirety of 2014 showed tax revenue of $52.6 million. Through November 2015, CMED data shows $72 million has been collected. 

Colorado actually has four ways of generating revenue from marijuana:

  • The state imposes a 15% marijuana excise tax on the transfer of wholesale cannabis, which is primarily designed to go toward education.
  • It tacks on a special 10% retail marijuana sales tax, some of which goes back to participating communities and local governments.
  • It has a standard 2.9% sales tax imposed when a medical or recreational consumer buys the product.
  • It collects licensing and application fees associated with processing marijuana, growing marijuana, or operating a marijuana business.

Proposition BB wound up giving Colorado schools around $40 million in tax revenue generated in 2014, so schools could wind up getting in the neighborhood of $60 million when the next state budget is drawn up.

It's also worth noting that the bulk of growth has come from the retail side of the equation. Based on revenue collected from the standard 2.9% tax, medical marijuana tax revenue jumped 16% through the first 11 months of 2015, compared to a 76.2% increase in retail marijuana tax revenue.

Image source: Flickr user Arbri Bacardi.

Colorado's success doesn't guarantee success for the industry
The success in Colorado certainly bodes well for other recreational legal states, such as Washington and Oregon, and it gives other states considering recreational marijuana in 2016 all the more reason to get an initiative or referendum on the ballot.

But, here's what's really interesting: Marijuana's expansion into new markets still may not mean a big degree of success for marijuana businesses as a whole. Why? Primarily because the federal government continues to hold firm to its position of classifying marijuana as a schedule 1 drug. As a schedule 1 drug, marijuana is deemed to be illicit and have no medical benefits. Lawmakers are in no rush to consider changing marijuana's scheduling until they have an opportunity to get a more encompassing view of its safety profile -- both the good and the bad.

This inaction is a big problem for marijuana businesses. Without legalization at the federal level, marijuana businesses are unable to take normal business deductions off their gross profits, meaning they're paying more in taxes than they should be, and many have limited access to basic banking services, such as a line of credit, or even a checking account. No banking access makes paying employees in anything other than cash nearly impossible, and it also makes security a big concern.

So, what does that mean for you? It could mean legal marijuana is coming to your state or a state near you soon, but it doesn't appear to suggest marijuana is in any way worthy as an investment at this time. If the federal government changes its tune in the future, then marijuana stocks may turn out to be viable investment opportunities. In the meantime, they remain very high-risk investments, with the long-term survival of marijuana businesses simply not guaranteed.