We at Grown Rogue believe that it is not a question of if–but when the federal government legalizes marijuana for both medical and recreational purposes.
We could support our position in a myriad of ways. We could argue that the public sentiment tide has turned with Gallup reporting in 2016 that 60% of Americans support federal legalization (up from 35% in 2003-2005) and 45% of Americans openly admit they’ve tried it. We could argue states’ rights (which was the basis for the famous 2013 “Cole Memo” recently under Attorney General Jeff Sessions’ scrutiny). For fun, google the correspondence that Sessions and the various state administrations are having this week.
But at Grown Rogue we are fundamentally capitalists. The federal government will decide that they, and states, cannot afford to keep this prohibition up. The tax revenue is simply too lucrative for state budgets already tapped, and the cost of keeping cannabis federally illegal is too much.
How Federal Marijuana Law Impacts Legal Cannabis Companies
From a business standpoint, the cannabis industry is like any other- with additional challenges thanks to federal prohibition that prevent this industry to developing into the international export juggernaut US Cannabis could become.
Why? Running a business is hard enough. However, with federal prohibition, a variety of the tools typical businesses have to help them are not available. This includes, but is by no means limited to:
- Banking/depositing funds limitation = primarily cash business. Right now, only state chartered credit unions are able to take funds; any federally chartered financial institutions do not accept funds from plant touching businesses. You have the same problem for using credit cards for consumers looking to purchase cannabis, making this industry a primarily cash business. Practically that means you have a lot of cash changing hands; not ideal for accounting, loss prevention, and/or employee safety.
- Access to credit lines/commercial loans. While other businesses would have a variety of commercial loan products available (using inventory, land, and/or equipment as collateral- not to mention SBA, agriculture subsidies, etc.), most investments in the legal cannabis space come in the form of private individual investment, specialized private equity funds, and increasingly foreign public capital markets. That leaves costs of capital significantly higher than in other businesses.
- 280e, a federal restriction on typical tax deductions business take, is a costly and time intensive provision to structure around. Add to this challenge the fact that many national & regional accounting firms are not yet accepting cannabis clients, and you have a lack of service provider options with a tricky tax structure standpoint.
- Access to insurance, business services. etc. When we went out to quote the cannabis insurance market, there were significantly fewer insurance companies (see bank restrictions above) that were able to provide simple business coverage quotes. Last year, an executive in Terra Tech was denied personal life insurance just being employed in the space. Even Quickbooks took a position that it was not accepting Cannabis clients (we chose Xero).
Any one of these issues are not fatal, but it makes life difficult, and ultimately decreases productivity and profitability. It also creates barriers to entry for the historic marijuana farmers that should move to recreational production, but because of these barriers choose to remain in the black market. All of this, in turn, limits tax revenue. Turning to that…
Cannabis Tax Revenue vs. Costs for War Against Drugs
Consider the tax revenue that the states have received who have legalized cannabis just from intrastate consumption:
- Washington, 2016- $256M tax revenue
- Colorado, 2016 – $200M tax revenue (estimated $506 since legalized in 2014)
- Oregon, 2016- $60M tax revenue
Those numbers don’t include the additional revenue from payroll taxes and/or additional economic impact from auxiliary service businesses and local economy boosts.
Forbes reported earlier this year that the legal cannabis industry was worth an estimated $7.2B in 2016, and expected to increase at an annual compounded rate of cannabis increase at 17% per year. By 2020, it is expected to create more jobs than manufacturing. And again, this only assumes intrastate sales–not international exports whatsoever.
So taxes increase, which obviously funds budget shortfalls for things like our schools. But what if we could weigh the increased tax revenues against the costs of waging the war against the black market cannabis production and distribution?
And in 2010, a Harvard University economist, Jeffrey Miron, argued just that in “The Budgetary Impact of Ending Drug Prohibition”. He estimated that legalizing marijuana could mean a $20 billion annual boost to state and federal governments when you combine the decreased costs in law enforcement and incarceration with the increased tax revenue. That was in 2010. Consider the compounded rate Forbes is quoting for the industry.
And then consider the estimated federal debt at the end of 2017 at $20.4 trillion.