There have been few, if any, industries hotter than legal marijuana in the stock market this year. A majority of publicly traded marijuana stocks with a market cap of $200 million or greater have seen their valuations at least double over the past year.
Topping the list of catalysts behind these gains have been robust sales growth figures and growth projections. For instance, Marijuana Business Daily‘s newest report, “Marijuana Business Factbook 2017,” suggests that legal weed sales could grow by 30% in the U.S. in 2017, another 45% in 2018, and by an aggregate of 300% between 2016 and 2021 to $17 billion. With few industries demonstrating such consistent growth, marijuana stocks have become a favorite of U.S. investors.
We’ve also seen a major shift in the way the public views cannabis. Gallup, which has been surveying the public on pot for nearly 50 years, reported that a record number of respondents (64%) are now in favor of seeing marijuana legalized, as of October 2017. Comparatively, just 25% of respondents felt this way back in 1995, the year before California became the first state to legalize medical cannabis for compassionate use cases.
Despite all of this, cannabis remains an illegal (Schedule I) substance at the federal level, constraining the ability of U.S.-based pot companies to succeed.
With this in mind, here are the three most pressing questions for the U.S. marijuana industry heading into 2018.
1. Will Jeff Sessions tee off on the marijuana industry?
Probably the biggest question on the minds of the entire pot industry is what’s going to happen with Attorney General Jeff Sessions and his hell-bent quest to prosecute marijuana businesses currently operating in states that have passed legal weed laws?
Sessions has made no secret of his feelings about marijuana’s expansion. He’s been quoted as saying that “good people don’t smoke marijuana,” and has suggested that medical cannabis isn’t an appropriate substitute to fix the opioid crisis. In May, he sent a letter to a few of his congressional colleagues requesting that they repeal the Rohrabacher-Farr Amendment. This is what disallows the Justice Department from using federal funds to prosecute marijuana businesses operating in legal states.
What’s worth noting is that this amendment, now known as the Rohrabacher-Blumenauer Amendment, was blocked from vote by the GOP-controlled House Rules Committee in September, leaving it out of federal budget discussions at the time. This amendment needs to be approved each year in order to keep the Justice Department from using federal dollars to prosecute U.S. pot businesses. The Senate could always add it to their federal spending proposal, but the chance that it could be excluded from future federal spending bills is arguably higher than it’s ever been.
If Sessions were to get his way, it would essentially be the end of the legal weed experiment in the United States.
2. Will 280E reform gain any momentum?
Another pretty important question on the minds of investors is whether lawmakers on Capitol Hill will consider adjusting how marijuana businesses are taxed.
According to U.S. tax code 280E, a more than three-decade-old rule on the tax books, companies that sell federally illegal substances are disallowed from taking normal corporate income-tax deductions. Essentially, any pot businesses that manages to turn a profit is often paying an effective tax rate of between 70% and 90% on that profit as opposed to the 15% to 30% most “normal” businesses would pay. When compounded with their inability to receive basic banking services, including something as simple as a checking account, you can get a better understanding of why U.S. marijuana companies are struggling to get ahead.
During the GOP’s discussion of its tax proposal in the Senate in late November, Sen. Cory Gardner (R-Colo.) submitted an amendment that would have modified 280E to exclude marijuana companies, providing them with more capital to create jobs, expand, and reinvest. However, the amendment never even came to vote, with Gardner not convinced he had enough support for the measure. It’s worth noting that Gallup’s October 2017 poll was the first time ever that more Republican respondents favored legalization (51%) than did not.
Perhaps the biggest issue is the $1.5 trillion deficit the new GOP tax law is expected to ring up over the next 10 years. The federal government presumably needs every drop of tax revenue it can get. Therefore, if it can continue to pilfer extra funds from the marijuana industry as a result of an archaic tax rule, then it’s likely to continue to do so, in my opinion.
3. Which states have a real shot at legalizing recreational weed?
Lastly, optimists want to know which states are the likeliest to legalize recreational marijuana next. No offense to the medical cannabis movement, but with 29 states having already legalized, the patient pool and primary growth drivers involves recreational weed approvals at this time.
One of the likeliest candidates looks to be Arizona, which narrowly failed to pass Prop. 205 by a mere 2% in November 2016. It’s worth remembering that California and Oregon both failed to pass recreational weed laws on their first go-around, while Florida also failed to pass its medical cannabis amendment by roughly 2% in 2014. Such close defeats often serve as bull’s-eyes for pro-legalization groups to focus their efforts, making Arizona a likely candidate to legalize in the November 2018 elections.
Another state that’s vaulted onto the list of likely to legalize is tax-heavy New Jersey. Democrat Phil Murphy beat out Republican Lt. Gov. Kim Gudagno for Chris Christie’s seat in November, and Murphy has stated that he’d sign adult-use legislation if it reached his desk. New Jersey’s predominantly progressive legislature, which is always in need of additional funding for its budget, appears likely to put cannabis legislation together in 2018 for Murphy’s signature.
Even Michigan could get in on the action after more than 360,000 signatures were collected in favor of putting an initiative on the November 2018 ballot. That’s more than 100,000 signatures over what needed to be collected, and it demonstrates the support Michigan residents appear to have for legalizing adult-use pot.
The more states that give the green light to marijuana, the more sway pro-legalization advocates may have with a conservative Congress.