The marijuana industry is budding before investors’ eyes, with the North American market slated to grow by an average of 28% through 2021, hitting approximately $24.5 billion in annual sales within a few years, according to cannabis research firm ArcView.
Furthermore, the public’s opinion about cannabis has taken a dramatic turn in recent years. In the U.S., numerous polls have found strong support for the idea of legalizing recreational cannabis, with even more overwhelming support for the legalization of medicinal marijuana. Combined, rapidly growing sales and shifting opinions have produced the perfect environment for marijuana stocks to thrive. Many are in fact up more than 1,000% over the trailing-two-year period.
To boot, Mexico legalized medical weed in June 2017, and Canada appears to be on the doorstep of becoming the first developed country to legalize recreational cannabis by this summer. Doing so is forecast to lead to $5 billion or more in annual sales.
What legalization could mean for the United States in terms of tax revenue and jobs
Yet, when examining the global cannabis market, no country offers more potential than the United States. If the U.S. were to legalize cannabis at the federal level, it could reap a king’s ransom in tax revenue over the next decade, as well as spur plenty of direct and ancillary industry job growth, according to a new report from cannabis data analytics firm New Frontier Data.
The report suggests that if the U.S. were to do away with its extremely strict Schedule I classification — which means the drug is entirely illegal and highly prone to abuse — and legalize it for all 50 states, it could generate $131.8 billion in federal tax revenue between 2017 and 2025.
New Frontier came up with this figure by assuming a 15% retail sales tax, payroll tax deductions, and business tax revenue (calculated at 35%). When all is said and done, an estimated $51.7 billion in tax revenue from the sale of legal pot would be collected by the federal government. Admittedly, $51.7 billion over nine years isn’t much when we’re talking about a roughly $4 trillion annual budget, but any new source of revenue becomes valuable when we’re also dealing with annual federal deficits in the hundreds of billions of dollars.
Additionally, legalizing cannabis nationally would be a major boon to the jobs market. Aside from the vertical chain of production, from growers, to processors, and then retailers, there are dozens of ancillary businesses that would benefit. These include banks, consulting services, logistics companies, marketing companies, accounting firms, and so on. If legalized today, some 782,000 jobs would be created, per New Frontier. But by 2025, this figure will have grown to 1.1 million jobs. In effect, the legal marijuana could be the fastest-growing industry in the U.S. under such a scenario over the next decade.
Interestingly enough, the 1.1 million new jobs, as well as the $51.7 billion in aggregate tax revenue, still assumes that 25% of all cannabis sales will remain in illegal channels. As of 2016, per ArcView, $46.4 billion of $53.3 billion in estimated North American cannabis sales were being conducted on the black market.
For now, this is a pipe dream
But in spite of 29 states having legalized cannabis in some capacity, including nine that have given the green light for adult use, there’s virtually no chance of marijuana being legalized anytime soon under the Trump administration.
To begin with, Attorney General Jeff Sessions is waging a veritable war against the pot industry. After unsuccessfully requesting the repeal of the Rohrabacher-Farr Amendment in 2017 — this is what protects medical marijuana businesses from federal prosecution — Sessions succeeded in rescinding the Cole memo on Jan. 4, 2018. The Cole memo had outlined a set of loose “rules” that legalized states would follow in order to keep the federal government off their backs, such as ensuring that weed grown within a state stayed in that state. Its rescinding opens the door for state-level prosecutors to bring charges in violation of the Controlled Substances Act against businesses and/or individuals, with discretion.
Secondly, it appears that President Trump is taking a harder line on cannabis than once believed. During his campaign, Trump cited that he was “100 percent” behind the idea of medical marijuana, but that recreational pot is something that would need to be examined further. Recently, though, Trump put the kibosh on Israel’s plans to export cannabis to the U.S. — the United States would have been Israel’s biggest market — suggesting that the president has little interest in seeing the reach of medical marijuana expand.
Lastly, the powers that be had their opportunity to consider rescheduling or de-scheduling cannabis in 2016, and they chose to do nothing. The U.S. Drug Enforcement Agency (DEA) reviewed two petitions that called for the rescheduling of cannabis and, following the recommendation of the Food and Drug Administration, chose not to alter its current scheduling. The DEA cited abuse concerns and the current lack of clinical evidence of the medicinal impacts of cannabis as reasons to keep its scheduling unchanged.
Canada is where the actions is
Instead of the United States leading the cannabis market forward, it’s Canada that’s taken charge. Investors have been predominantly focusing their attention on our neighbor to the north, which should benefit from a surge in demand, sales, and jobs growth. In fact, most Canadian pot stocks are expanding their capacity, either organically or through partnerships and acquisitions, as quickly as their wallets will allow.
Aphria, which is slated to be one of the top-three producers in Canada, has suggested that it can deliver upwards of 230,000 kilograms a year by 2019. It has a four-phase build-out that’ll be capable of 100,000 kilograms annually, and Aphria recently partnered with Double Diamond Farms for another 120,000 kilograms of yearly production.
What’s notable in Aphria’s case, along with a number of other Canadian cannabis growers, is they’re putting their U.S. expansion ambitions to bed for the time being. Just last month, Aphria announced the sale of its minority stake in Arizona-based Copperstate Farms for about $15 million. It and other growers simply don’t want to risk the legal ramifications of operating in markets deemed illegal by federal governments.
In short, while the pie-in-the-sky numbers for legalizing weed in the U.S. look great, it’s simply not a realistic pathway as long as Trump is at the helm and Sessions is in charge of the Justice Department.
