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This State Is 1 Signature Away from Legalizing Medical Marijuana -- Should Investors Be Stoked?

By Sean Williams - Apr 14, 2016 at 8:59AM

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Marijuana is among the fastest growing industries in the U.S., and a new state is about to be added to the mix.

Image source: Pixabay.

It's been about a year in the making, but Pennsylvania stands on the literal cusp of becoming the 24th state to legalize the use of medical marijuana.

It'll be official this Sunday
In March, Pennsylvania's House of Representatives passed Senate Bill 3, a bill that was introduced in mid-2015 by the Senate seeking to legalize medical marijuana. The House, which approved the bill by a vote of 149-43, did so only after making more than 200 amendments to the originally proposed bill. The revised bill, presented to the Senate roughly three weeks prior, narrowed the scope of treatments to a little more than one dozen ailments, including cancer, glaucoma, epilepsy, HIV/AIDS, Parkinson's disease, and post-traumatic stress disorder.

On Tuesday, the Pennsylvania Senate approved Senate Bill 3 by a wide margin, 42-7, inclusive of the amendments provided by the House. The bill will officially become a law this coming Sunday, when Democratic Gov. Tom Wolf honors a previous pledge to sign any medical-marijuana legislation that reaches his desk into law. 

The bill establishes quite a few protocols that will need to be followed within the state. Eligible patients will be issued identification cards that can be used at any of the 150 dispensaries across the state. The cards would be renewed on an annual basis. Dispensaries and business are going to be required to be licensed by the state, paying hefty licensing and registration fees in the process. And, as expected, a 5% tax is to be imposed on the gross receipts from the sale of marijuana by growers to a dispensary. This tax will likely be passed along to the consumer at the retail level. Lastly, marijuana will only be sold in liquid, pill, or oil formulations, and not in leaf or bud form.

Image source: Flickr user Cannabis Culture. 

Investors cheer
Word of Pennsylvania's medical-marijuana victory is liable to make prospective investors and proponents of marijuana cheer for two very good reasons.

First, Pennsylvania's approval represents another metaphorical notch on the pole for the marijuana industry. President Obama has suggested that the best way to get Congress to take up a marijuana initiative is to keep approving its use at the state level. If the federal government were to alter its stance on marijuana by changing its scheduling, or perhaps even approving its medical use, it could have wildly positive impacts on the industry in terms of patient treatment and profits for industry investors.

Secondly, we've already witnessed what a powerful impact marijuana sales can have on tax revenue collected within a state. In Colorado, for example, just shy of $1 billion in recreational and medical marijuana was sold in 2015. Of this total, roughly $135 million was collected via tax revenue and licensing fees. This money can be used to help Colorado's schools and law enforcement, while profits for dispensaries, growers, and processors, can be used for job and business expansion. On paper, the marijuana industry is among the fastest growing industries in the United States, and that growth is definitely attracting investors.

Caution warranted
But what's on paper and what actually transpires can be two completely different stories. There are a number of reasons investors might be wise to exercise caution in light of marijuana's rapid expansion and Pennsylvania's imminent medical-marijuana approval.

On a smaller scale, and just addressing this from the perspective of Pennsylvania, it could be a year or more before the infrastructure is in place (ID cards, dispensaries, grow farms, and so on) to begin operating its medical-marijuana network. Although this is a win on paper, eligible patients in Pennsylvania could still have a long wait on their hands before they have access to medical marijuana.

Image source: Pictures of Money via Flickr.

On a larger scale, a number of industry disadvantages could ultimately disappoint marijuana investors if federal government inaction persists.

An example would be the way marijuana businesses get treated for tax purposes. Just because marijuana is illegal at the federal level doesn't mean marijuana businesses get out of paying corporate income tax. The big downer is that because they're dealing with a federally illegal substance, marijuana businesses aren't allowed to take normal business deductions. In other words, marijuana businesses pay high tax rates.

Also, marijuana businesses have little access to basic banking services. Just 3% of the nation's roughly 6,700 banks are currently working with the marijuana industry. The reason is that most financial institutions fear prosecution from the federal government, so they'd just as soon avoid the industry altogether. This means marijuana businesses are forced to deal in cash, which hinders expansion efforts and makes security a genuine concern.

The biggest worry of all might be the disadvantage legal marijuana faces relative to the black market. As long as marijuana remains a tightly regulated industry with licensing fees and high taxes in legal states, competing with the black market based on per ounce price is nearly impossible.

Changes at the federal level could certainly improve the investable potential of marijuana, but without those changes no amount of state-level approvals would be enough to personally coerce me to consider marijuana a smart investment.

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