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Marijuana Could Have a Surprising Economic Impact, New Report Shows

By Sean Williams – Mar 26, 2016 at 11:41AM

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Marijuana's economic impact could more than triple over the next five years -- and that's not even the biggest surprise.

Image source: Pixabay.

Yesterday we witnessed the release of Batman vs. Superman: Dawn of Justice, a highly anticipated movie depicting an unstoppable force and the proverbial immovable object. But what many people might overlook is that we've been witnessing a real-life battle for years beyond the confines of the movie theater between a seemingly unstoppable force known as marijuana, and the federal government which has maintained its position as the immovable object.

The real-life unstoppable force and immovable object
Marijuana has grown by veritable leaps and bounds since it was first approved by Proposition 215 in California all the way back in 1996. Today we can count 23 states as having legalized the drug for medical purposes. Additionally, since 2012 four states (Colorado, Washington, Oregon, and Alaska) have legalized the sale of recreational marijuana. The result, at least for some recreation-legal states, has been explosive growth.

In Colorado, marijuana sales totaled $996 million in 2015, up 42% from the $699 million in legal marijuana sales registered in 2014. Of this $996 million, $587.8 million came from the sale of recreational marijuana. Two years prior, recreational marijuana sales would have been $0. Colorado also wound up netting $135 million in tax and licensing revenue from the sale of marijuana.

Image source: Flickr user Gabor Basch.

And behind this surge in growth is growing support for legalization. Gallup's most recent national poll shows that 58% of respondents are in favor of nationwide legalization, whereas a CBS News survey from April 2015 pegged medical marijuana legalization support at an overwhelming 84%.

Yet another side exists to marijuana's expansion: resistance. The federal government sees no quick or easy pathway to legalizing marijuana, recreationally or medicinally, until such time as lawmakers have ample safety data available and can come to a comprehensive conclusion as to whether or not the drugs' possible benefits outweigh its noted risks. With an imbalance of clinical studies weighted toward marijuana's potential negatives, it could be some time before lawmakers feel comfortable making this decision.

Marijuana appears to be a winner no matter what happens
So which force looks poised to win? According to a new report from Marijuana Business Daily and its Marijuana Business Factbook 2016, it won't matter what Congress does – marijuana's growth trend is practically unstoppable.

Following an economic impact totaling $6.4 billion in 2013, a range of $8 billion to $9.6 billion in 2014, and $12 billion to $13.6 billion in 2015, Factbook estimates an economic impact of $14 billion to $17.2 billion in 2016. Comparing 2015's and 2016's estimates at the midpoint, we're looking at growth of 22%.

But, the industry isn't stopping there. Factbook estimates that the total impact of the marijuana industry could soar to a range of $24.4 billion on the low end to $44 billion on the high end by 2020. The variance between these two figures, as described by Marijuana Business Daily, is based on estimates of whether or not the federal government keeps marijuana illegal (low-end estimates) or if it institutes a sweeping legalization of the drug (high-end estimates).

Image source: Flickr user Cannabis Culture.

The real surprise in this new report
Yet, it's the composition of Factbook's growth estimates that yields the biggest surprise. Retail marijuana sales are expected to grow from a midpoint of $3.2 billion in 2015 up to an estimated $11 billion in 2020. An expected tripling in sales is impressive. But look at the big picture. If marijuana sales equate to just $11 billion as forecasted, it means additional economic impacts are responsible for $13.4 billion to as much as $33 billion in economic impact by 2020.

What are these "additional economic impacts?" Beyond just selling marijuana and allowing states to reap tax benefits and licensing fees, the marijuana industry is providing paying jobs to Americans, and opening up a host of industries that could flourish if marijuana continues to expand. Beyond being a budtender there are opportunities to become a farmer, processor, business and industry consultant, courier, accessories merchant, security guard, or perhaps even provide cloud-based management software for marijuana businesses.

Additionally, the tourism industry could benefit in a big way from the emergence of marijuana. A Denver Post report from mid-2014 showed that out-of-state visitors accounted for about half of all recreational marijuana sales in the Denver area, and were responsible for almost 90% of recreational marijuana sales in mountain resort communities.

Thus, marijuana's biggest impact may not be seen in tax and licensing revenue at all, but the intangibles of job creation and external industry growth.

One area where few winners may exist
Even though the marijuana industry looks poised for success (based on Factbook's figures) regardless of what the federal government chooses to do, that still doesn't mean you as an investor will necessarily benefit.

Image source: Pictures of Money via Flickr.

The reason why is because the federal government's inaction leads to two inherent disadvantages for marijuana-based businesses.

First, even though the federal government deems the marijuana plant to be illegal, it still expects marijuana businesses to pay federal income tax. Adding salt to the wound, since these businesses are selling a substance deemed illicit by the federal government, they won't be allowed to take normalized tax deductions, like rent. The result is that most marijuana businesses are paying federal income tax on their gross profits instead of net profits.

The other source of frustration is that most financial institutions are avoiding working with marijuana businesses due to fear of federal prosecution and/or fines from the federal government at a later date. Although some states do have workarounds in place for banks to provide checking accounts and credit lines to marijuana businesses, only around 3% of the nation's banks have been willing to work with businesses involved in marijuana.

Paying extraordinarily high tax rates and having to deal predominantly with cash is a recipe that constrains the ability for most marijuana businesses to grow. Thus, while marijuana continues to grow on a national scale, it's probably best for you to continue to watch its ascension from afar until such time as the federal government decides to change its stance on the drug (which is no guarantee).

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

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