In terms of sales, the marijuana industry has been budding before our eyes. Global revenue more than tripled between 2014 and 2018 to $10.9 billion, and forecasts suggest that legal weed sales will grow many times over in the years that lie ahead.
Yet -- and this may seem strange – marijuana remains illegal in what can easily be called the most lucrative market in the world, the United States.
According to various estimates, the U.S. should be responsible for a third, to perhaps more than half, of global cannabis sales. But this hinges on the federal government's willingness to change its tune on pot. As it has remained for decades, marijuana is classified as a Schedule I drug. That means it's entirely illegal, considered prone to abuse, and not recognized as having any medical benefits.
Right now, the prospects of cannabis reform look terrible at the federal level. However, Democratic presidential candidate Bernie Sanders (I-Vt.) wants to change that perception.
Bernie Sanders unveils his cannabis legalization plan
Last week, Sanders released a multipoint plan designed to legalize marijuana at the federal level within the first 100 days of taking office as president. His plan detailed four major talking points:
- Marijuana would be legalized by executive order within the first 100 days.
- All previous cannabis convictions at the federal and state level would be reviewed for expungement and/or resentencing.
- Communities hit hardest by the War on Drugs would be the likeliest to benefit from marijuana's legalization.
- Cannabis nonprofits would be promoted while ensuring that Big Tobacco is excluded from participating in the rise of the U.S. cannabis industry.
To add to the final point, Sanders, who has called on significantly higher tax rates on the wealthy and corporations, would also institute market share and franchise caps that are designed to prevent excess profiteering from minimal competition.
Were Sanders' plan to come to fruition, it would be a major blow to Altria Group (NYSE: MO), which has already sunk $1.8 billion into Cronos Group (NASDAQ: CRON) for a 45% non-diluted stake in the company. Altria, the company behind the famed Marlboro brand, also owns a 35% stake in Juul, the most popular vaping device in the United States.
The thinking has been that Cronos would first work side by side with Altria in Canada to roll out a line of cannabis-based vape products, and eventually transition this then-established line of products to the U.S., if Capitol Hill ever changes its view of marijuana. Under Sanders' legalization plan, there would be no place for Altria in the U.S. market, which would cut off a major source of future revenue.
Sanders needs a reality check
In many respects, Sanders' legalization plan reflects the will of the people. For example, the latest national survey from Gallup earlier this month showed that 66% of Americans favor the idea of legalizing recreational pot. Using executive action to make this happen would probably sit well with a lot of Americans.
Furthermore, Sanders' plan follows in the footsteps of legislation recently passed in Illinois, which not only legalized recreational marijuana in the Land of Lincoln but also aims to expunge the convictions of nearly 800,000 non-violent criminals who purchased or possessed cannabis.
However, Sanders' planned usage of $50 billion in revenue from the sale of legal cannabis should have a lot of folks asking, "What's he smoking?"
One of the ways Sanders plans to help communities that were hit hard by the War on Drugs is by putting $50 billion in collected legal marijuana tax revenue to work in a variety of ways:
- $20 billion is to be used to "provide grants to entrepreneurs of color who continue to face discrimination in access to capital."
- $10 billion will go to create a grant access program for business that are at least 51% owned or controlled by folks who were arrested or convicted of a marijuana offense, or live in a community disproportionately affected by the War on Drugs.
- $10 billion would set up a U.S. Department of Agriculture grant program to help disproportionately affected areas and people who've been arrested or convicted of a cannabis offense.
- $10 billion would go toward a "targeted economic and community development fund to provide grants to communities hit hardest by the War on Drugs."
Sounds great, right? Just one problem -- Sanders didn't lay out any specifics on how the federal government is going to raise $50 billion in revenue from the sale of legal cannabis, other than through "new tax resources."
More importantly, Sanders needs a pretty serious reality check if he thinks the federal government is going to be able to slap an additional tax on top of legalized cannabis without adversely affecting legal channels.
California showed us what happens when you overtax legal marijuana
Take California as a perfect example. In November 2016, California residents voted to pass Proposition 64, thereby legalizing recreational marijuana. This legalization effort was expected to fairly quickly yield more than $1 billion in tax revenue for the Golden State. Yet in the first year of adult-use sales, aggregate pot revenue fell (yes, fell) by $500 million to $2.5 billion, and collected tax revenue was almost half of what was initially expected. In other words, California sold more medical marijuana in 2017 than it did of combined medical and recreational weed in 2018.
What gives? In addition to state and local sales tax, which are a fixture on all goods sold within the state, California tacks on a 15% excise tax for adult-use marijuana sales, as well as a wholesale tax on dried flower or cannabis leaves. As a whole, this tax rate can reach as high as 45% in some locales, and it still doesn't account for other added costs that are passed onto consumers, such as laboratory testing by cannabis distributors to ensure product purity and quality. In essence, legal marijuana is so much pricier than black-market weed that consumers have simply decided to stick with their black-market suppliers.
With this evidence in mind, Sanders' plan to raise $50 billion in marijuana tax revenue at the federal level without leading to any adverse repercussions to the legal channel is just absurd. Mind you, I'm not picking on any other specifics of Sanders' plan here, which seem to jibe with the popular opinion of Americans. Rather, my beef with Sanders' plan lies solely with the tax component, which would make legal marijuana even more expensive and further widen the pricing gap between legal pot and illicit producers.
To be blunt, Sanders' plan has virtually no chance of succeeding.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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