Amid the chaos of 2020, which has included a stock market crash, the 2019 coronavirus disease pandemic (COVID-19), and even an uproar over the arrival of killer hornets, he still realizes that this is a electoral year. In just over four months, Americans across the country will either go to the polls or mail their ballots to determine who will lead the United States for the next four years.
Among the many issues that will receive more attention than in the past year, these elections are marijuana. In each of the past two years, the Gallup National Poll found 66% of respondents in favor of legalization. Other surveys, while differing in nominal support value, also show overwhelming and clear evidence that the American public favors legalization.
Similarly, we have witnessed that two thirds of all states have given the green light to medical marijuana since 1996, and 11 of these states also allow the legal use of cannabis for adults.
If opinion has evolved at the state level and among the public, you may wonder why we have not witnessed such reforms at the federal level about cannabis.
Image source: Getty Images.
The political divide in Washington is a key reason why marijuana remains illegal
One obvious reason is that there is a fairly wide political divide on Capitol Hill regarding marijuana. Polls have consistently shown that liberals, self-identified Democrats, and younger adults have the most favorable view of legalizing marijuana, while conservatives, self-identified Republicans, and older people share the least favorable views of cannabis. As of June 1, 2020, the average age of members of the House of Representatives was 57.6 years, with an average age of 62.9 years for members of the Senate. This means that most legislators are older people and therefore unlikely to be delighted with the prospect of legalization.
To build on this point, the Senate is currently led by a somewhat thin Republican majority. Senate Majority Leader Mitch McConnell (R-Ky.) Has made it clear that he has no intention of allowing cannabis legislation to hit the ground to vote.
Also, President Donald Trump has not exactly thrown his hat into the legalization column. Although he commented during his 2016 campaign that he was “one hundred percent” in favor of legalizing medical marijuana, he has now appointed two attorneys general (Jeff Sessions and William Barr) who have strongly opposed any kind of reform of marijuana at the federal level. .
Trump has even included presidential signing statements for cannabis-related legislation. Presidents generally attach a signing statement to legislation that they believe may impede their ability to do their job established by constitutional mandate. In effect, Trump’s signing statement always leaves the door open for the federal government to impose its higher law and repress the cannabis industries at the state level.
Image source: Getty Images.
The real reason that cannabis is still illegal has to do with money.
This political divide is the easy explanation of why marijuana remains illegal at the federal level, but it doesn’t tell the full story. The surprising reason the United States is reluctant to legalize cannabis has a lot to do with money.
One of the most common suggestions I hear when mentioning the growing federal budget deficit is the legalization of marijuana. The idea is that if cannabis were legalized at the federal level and taxed, it could generate a significant amount of money for the federal government, which would somehow help minimize its annual deficit. This sounds great on paper, but a deeper dive shows why things remain unchanged.
Since 1982, the US tax code contains a provision known as 280E, which reads as follows (courtesy of Cornell Law School):
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in the conduct of any trade or business if said trade or business (or the activities that comprise said trade or business) consists of the trafficking of controlled substances (in the meaning of annexes I and II of the Controlled Substances Law) which is prohibited by federal law or the law of any State in which said trade or business is carried out.
Image source: Getty Images.
Essentially, 280E is designed to prevent companies that sell a Schedule I or II substance (marijuana is classified as Schedule I) from accepting deductions or normal corporate credits. With the exception of the cost of goods sold, US cannabis companies cannot take normal corporate deductions on their federal tax filing.
Why is this important? Without the ability to take normal deductions, marijuana companies are exposed to an extraordinarily high effective tax rate that the Internal Revenue Service has no qualms about charging.
Here’s the crux of the matter: Marijuana legalization no longer exposes marijuana companies to 280E and its high effective tax rate, but it also doesn’t generate nearly as much taxable income for the federal government, even if you add a federal tax to legal weed sales. Keep in mind that adding another tax to legal marijuana would mean some consumers will shift their buying habits outside of legal channels and into the black market due to cost.
In other words, the status quo of marijuana being illegal at the federal level with the legalization of more and more states has become highly profitable for the federal government. That’s a big reason for which there is reluctance to legalize.
Joe Biden listening to former President Barack Obama speak. Image source: Official White House photo by Pete Souza.
Another possible legalization obstacle
As the icing on the cake, even if the 2020 elections lead to a jolt in Congress, as Democrats retaking the majority in the Senate and Democratic Party candidate Joe Biden winning the White House, there is still no guarantee that any event will occur. type of federally significant reform.
Assuming for a moment that Congress can agree on a marijuana legalization bill, Joe Biden has not suggested that he would be willing to pass it. As a senator, Biden had a long history of being exceptionally strict on drug crimes, and in the late 1980s and early 1990s he proposed a handful of bills that would have harshly treated drug traffickers, and this would have included cannabis. Even though Biden’s stance on cannabis has changed dramatically in the past 30 years, he is only willing to decriminalize marijuana at the federal level, not legalize it.
Similarly, if Donald Trump wins a second term, we would almost certainly see the status quo continue. A lot would depend on the political makeup of Congress, but President Trump has been fairly forthright that he has no intention of legalizing cannabis at the federal level.
Keep in mind that this reluctance to legalize isn’t necessarily a bad thing for US marijuana stocks.Although they have faced some operational layoffs and some initial financial hurdles, many of the larger multi-state operators are doing well. Trulieve Cannabis (OTC: TCNN.F), which has focused its attention on the legal market for medical marijuana in Florida, has opened 48 of its 50 operating dispensaries in the Sunshine State. Trulieve is currently the most profitable pure pot stock in North America on a nominal basis, and it does so with marijuana that remains federally illicit.
The bottom line is that I don’t expect legalization to happen in the United States any time soon.
