Super Tuesday Delivers a Crushing Blow to Cannabis Reform – Motley Fool
In case the mountain of political ads in your mailbox, online, or during television commercial breaks didn’t give it away, we’re smack-dab in the middle of election season in the United States.
As with all major election cycles, issues such as the economy, taxation, national security, and immigration have worked their way to the forefront. But an issue that’s bound to draw a lot of attention during the 2020 presidential campaign is marijuana.
Marijuana will take center stage during the 2020 election
As a reminder, cannabis is a Schedule I drug at the federal level. This classification means it’s entirely illegal, prone to abuse, and isn’t recognized as having any medical benefits.
This classification hasn’t stopped 33 states from legalizing medical marijuana in some capacity or kept 11 of those same states from also allowing adult consumption and/or the retail sale of pot. However, it has placed some pretty serious constraints on the businesses growing, processing, distributing, or selling weed in these states.
For example, marijuana’s Schedule I classification subjects profitable pot companies to Section 280E of the U.S. tax code. This is a section of the tax code that was added in the early 1980s to ensure that illicit drug smugglers couldn’t write off their “business expenses” on their federal income tax returns. Today, 280E disallows marijuana businesses in legalized states from taking normal corporate income-tax deductions, save for costs of goods sold. For profitable marijuana companies, this can lead to an exceptionally high effective tax rate.
Financing can also be a serious concern tied to the Schedule I classification. Because financial institutions like banks and credit unions report to the Federal Deposit Insurance Corporation (which you probably know better as the FDIC), a federally created agency, they fear the possibility of criminal and/or financial penalties for violating federal law. Thus, gaining access to nondilutive forms of financing, such as a loan or line of credit, can be extremely difficult for cannabis companies.
The hope during this election season is that a candidate will be chosen who supports cannabis reform, as well as follows the will of the American public, which is overwhelmingly in favor of legalizing marijuana. The U.S. is the largest marijuana market in the world by annual sales potential, making it a lucrative market worth eyeing by cannabis companies.
However, if the results on Super Tuesday are any indication, the prospect of real reform at the federal level is fading quickly.
Super Tuesday dashes hopes for near-term cannabis reform at the federal level
One week ago, on the day of the South Carolina primary and just days before Super Tuesday would send millions of voters in 14 states to the polls, there were nine presidential candidates still vying for the Oval Office. These included incumbent Republican Donald Trump, who is all but a shoo-in to lock up the Republican Party nomination for president, and eight Democrats.
A majority of these remaining candidates had either laid out a plan to legalize marijuana in the United States or expressed their views that cannabis should be legalized. This included Sen. Elizabeth Warren (D-Mass.), who had put out a very detailed two-pronged approach to legalize marijuana in the United States. It also included former South Bend Mayor Pete Buttigieg (D) and Sen. Amy Klobuchar (D-Minn.), both of whom had pledged to legalize marijuana if they were to become president. Unfortunately for cannabis-reform supporters, none of these candidates survived the week.
Of the four remaining candidates, Rep. Tulsi Gabbard (D-Hawaii) has just one pledged delegate, making it likely only a matter of time before she steps aside. That leaves three candidates — Donald Trump, former Vice President Joe Biden (D), and Sen. Bernie Sanders (I-Vt.) — to vie for the White House.
Incumbent Donald Trump, while amicable to the idea of allowing states the right to set their own cannabis policies, is likely the most negative toward recreational weed than any candidate in the field. In fact, according to the Trump reelection campaign’s director of strategic communications Marc Lotter, the president would prefer to keep currently illegal drugs as illicit. That includes cannabis.
Meanwhile, former Vice President Joe Biden spearheaded some of the harshest bills against drug users and dealers during the war on drugs and only recently announced that his views on cannabis have changed. While Biden has tinkered with the idea of decriminalizing marijuana, he remains steadfast against legalization.
Vermont Senator Bernie Sanders is the only remaining candidate who fully supports legalization, but he’s facing a potential uphill battle following the Super Tuesday delegate shakeout.
Clearly, there’s still a lot to be decided with regard to who will be in the Oval Office come 2021 and beyond, but the once-promising possibility of cannabis reform is looking far less likely now.
It’s a good-news, bad-news story for pot stock investors
If cannabis reform doesn’t happen at the federal level under the next president, it will be a disappointment, but it’s not a lost cause for cannabis companies or pot stock investors. On the bright side, the status quo of allowing individual states the right to legalize and establish their own regulations seems to be working well. Although it does mean that vertically integrated multistate operators are required to set up somewhat redundant growing and processing facilities in every state in which they sell cannabis, it hasn’t demonstrably slowed their growth potential.
For example, Green Thumb Industries (OTC:GTBIF) should be capable of opening 96 retail stores across 12 states. Green Thumb came into some of these licenses the old-fashioned way (i.e., organically), while it’s used acquisitions in other states to expand its reach. Acquisitions have been particularly helpful in Illinois and Nevada.
Illinois opened its doors to adult-use sales at the beginning of the year, while Nevada is expected to generate the highest per-capita cannabis spending by 2024, per the State of the Legal Cannabis Markets report from 2019. As long as the federal government gives legalized states a healthy leash to regulate their own pot industries, the Green Thumb’s of the industry can thrive.
However, a federally illicit environment is going to keep Canadian growers from entering the market. It’d be a particularly bad blow to Canopy Growth (NYSE:CGC), which agreed to acquire multistate operator Acreage Holdings in a cash-and-stock deal last year. Canopy’s deal, though, is on a contingent-rights basis. The only way it comes to fruition is if the U.S. federal government legalizes marijuana, which seems like a long shot if Trump or Biden is elected. This would force Canopy Growth to focus solely on cannabidiol (CBD) products within the U.S., thereby removing a large potential growth driver from the equation.
While marijuana can still be a big-time moneymaker for investors, the prospect of a near-term rebound in pot stock valuations is fading.
This article originally appeared here in https://www.fool.com/investing/2020/03/07/super-tuesday-delivers-a-crushing-blow-to-cannabis.aspx