The marijuana decriminalization movement appears to be set up for one doozy of an election season.
Once a taboo topic that politicians would avoid at all costs, marijuana legalization has become a closely followed national issue -- and for good reason. Pretty much all polls have shown that a majority of the American public is now in favor of legalizing marijuana. Surveys from Pew Research Center and General Social Survey showed a modest majority holding that view, whereas the latest polls from Gallup and AP-NORC resulted in 58% and 61% of respondents in favor, respectively.
Why the push to legalize is so powerful
The core constituencies for this support can be divided into three groups.
First, there are those who would benefit from greater access to medical marijuana. Medical marijuana is currently approved in 23 states, and a 24th could be right around the corner. Although each of those states has a different list of ailments that marijuana can legally be used to treat, glaucoma and certain terminal cancers are common to them.
Secondly, there are those who simply want the freedom to purchase marijuana for recreational purposes without the fear of local, state, or federal prosecution.
Finally, the third category are legislators who are looking for new ways to generate tax revenue without completely crushing the pocketbooks of their constituents. Marijuana certainly serves that purpose, since taxes on it only impact the businesses involved with, and the customers who buy, marijuana-based products. Since those taxes would affect only a minority of the population, the idea of them has generally been well-received.
Colorado has been the hallmark early example of success for legal recreational marijuana. The state logged nearly $1 billion in cumulative sales and $135 million in tax and licensing revenue in 2015. That was up 42% from 2014, when recreational marijuana first became legally available for sale within the state.
Three reasons California is marijuana's crown jewel
But for as much as Colorado has been a shining success for the legal marijuana industry, it's far from its crown jewel. That title would go to California, which is expected to have a recreational marijuana initiative on the ballot this coming November. If marijuana were legalized for recreational use in California, it would be the biggest win so far for the movement, and it would likely remain its most important victory shy of the federal government changing its stance on the drug.
Here are three reasons in particular why the California ballot initiative is so important to the marijuana movement.
1. California's economy is monstrously large
For starters, California has the largest economy in the United States by a mile. In fact, according to World Bank GDP estimates from 2014, if California were a country, it would rank as the eighth-largest economy in the world, trailing only the U.S. (excluding California), China, Japan, Germany, U.K., France and Brazil. It's larger than Russia, India, Canada or Australia. That enormous size could mean a profound jump in annual marijuana sales, as well as in the taxes and licensing fees generated by them.
However, don't forget that marijuana's expansion is about more than just tax revenue. It also creates jobs in the growing, processing, selling, consulting, financing, and even software industries. An approval in California would more than likely spur some job creation there, a win for both the state and the nation as a whole.
2. California's existing dispensary network is massive
If you thought Oregon was well-prepared for the approval of recreational marijuana with 250-plus medical marijuana dispensaries already in place, it has nothing on California which has somewhere between 500 and 1,000 marijuana dispensaries and clubs. Having this foundation in existence prior to approval would make it extremely easy to "flip the switch" and allow these dispensaries to begin selling marijuana for recreational purposes.
But the bigger factor here is that this infrastructure allows California's legal marijuana market to better compete against the black market. The more competition there is, presumably the more growers and shops there will be, creating an environment that drives down legal marijuana prices. Whether legal prices in California will be competitive enough to cannibalize the black market remains to be seen, but the infrastructure is certainly there for some switching to be observed.
3. California will draw big names
Finally, California's size means the ballot initiative fight is likely attract some of the largest and most high-profile donors to the campaign.
For example, in December, Sean Parker, the billionaire founder of music and file-sharing service Napster (which is now a part of Rhapsody) pledged to match donations for a measure to legalize cannabis in California on a dollar-for-dollar basis. Leafly estimates that Parker's optimism (and matching donations) could wind up costing the billionaire as much as $20 million.
Other high-profile names could also play major roles. Calvin Broadus, whom you probably know better as rapper Snoop Dogg, has been a regular investor in the Los Angeles medical marijuana market and even in marijuana delivery services. Snoop Dogg has a huge fan following, as do a number of actors and comedians who have come out in favor of legalization. These celebrities can be expected to use their fame to push for legalization in America's most-populous state.
Now for the bad news
Although California's grassroots campaign to legalize recreational marijuana may result in an approval this November, it still doesn't mean that common investors like you and me should be anywhere near the marijuana industry. Until the federal government decides to change its tune, the industry will continue to find itself behind the eight-ball.
Arguably the biggest issue is that the marijuana industry has no easy access to capital or basic banking services. Most states that have medical marijuana laws on their books allow for banks to follow a long list of regulations in order to serve the industry. Yet banks, in general, are avoiding marijuana-based businesses altogether for fear of federal prosecution at a future date. Most marijuana businesses can't even get checking accounts let alone lines of credit, meaning cash is king in the marijuana business, and security is a serious problem.
The other problem is corporate income taxes. Marijuana may be federally illegal, but marijuana businesses are still expected to pay taxes. As salt in the wound, marijuana businesses aren't allowed to take normal business deductions for things like rent, because they're selling a federally illegal substance. Long story short, marijuana-based businesses are paying far more than their fair share in taxes.
These factors are all you need to know as an investor to raise the red warning flag. Regardless of how quickly the marijuana business expands at the state level, it's federal legalization that matters most for investors.
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.
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