The Sneaky Reason Congress May Not Want to Legalize Marijuana

A book on federal and state marijuana laws next to a judge's gavel.

Though we're only a little over seven months into 2018, this has turned into a banner year for the legal cannabis industry. We've witnessed a handful of marijuana stocks up-list from over-the-counter to a reputable U.S. exchange, and seen Vermont become the first state to legalize adult-use marijuana entirely through the legislative process.

And, as the true highlight, we have stood in awe as Canada's Parliament legalized recreational marijuana. When sales begin on Oct. 17, Canada will be the first industrialized nation with authorized adult-use weed sales.

The legal cannabis movement stalls out on Capitol Hill

Yet, in spite of Vermont making history, and 30 states having legalized marijuana in some capacity in the United States, it remains side by side with some of the most restricted drugs, such as LSD and heroin, at the federal level.

According to the federal government, via the Controlled Substances Act, marijuana is a Schedule I drug. This means it's entirely illegal, is considered to be highly prone to abuse, and has no recognized medical benefits.

Of course, this last part could be under contention, with the U.S. Food and Drug Administration approving GW Pharmaceuticals ' (NASDAQ: GWPH) Epidiolex, the world's first cannabis-derived drug, on June 25. GW Pharmaceuticals' lead drug is cannabidiol-based. And in multiple clinical-stage trials, it provided a statistically significant reduction in seizure frequency relative to baseline and placebo for patients with Dravet syndrome and Lennox-Gastaut syndrome. That medical benefit contradicts the definition of a Schedule I substance, setting up a cannabis conundrum.

What's perhaps a head-scratcher about Congress' decision to stand pat on cannabis is that it's the opposite of what the American public would prefer, according to various polls. Five national polls over the trailing year have shown support for nationwide legalization of recreational cannabis, ranging from 59% to 64%. A separate survey from Quinnipiac University in April 2018 found that support for allowing physicians to prescribe medical marijuana was at a robust 93%. And yet, lawmakers have dug in their heels on Capitol Hill.

Well-known reasons the federal government has shied away from legalization

There are a number of surface-scratching reasons that lawmakers have been apprehensive about considering a rescheduling or complete legalization of pot. For instance, they worry about the impact that weed might have on adolescents. If marijuana were legalized nationally, the assumption is that teens would be able to access marijuana purchased or grown by their parents or friends. Previous early-stage studies have shown (albeit not conclusively) that regular cannabis use during adolescence can hurt long-term memory.

Lawmakers also have concerns about marijuana's impact on drivers. Although there are clear guidelines on what is and isn't legal with regard to alcohol consumption when behind the wheel (as determined by blood alcohol content and field sobriety tests), there are no such guidelines for cannabis use. There are breathalyzer tests in development to measure a person's system for tetrahydrocannabinol (THC) content -- THC is the psychoactive cannabinoid that gets you high. But determining how recently it was used (since THC can stay in the system for days or weeks) is still guesswork, at best.

And then there's conflicting data -- depending on the study, the city, or the time frame -- on whether legalizing marijuana can lead to an increase in crime.

Lastly, lawmakers have frequently called for comprehensive clinical data detailing the risks and benefits of cannabis use on the brain and body. Such data is difficult to come by; there is only one grow farm in the U.S., at the University of Mississippi, which restricts testing supply. Likewise, getting the OK from regulators to run such studies can be a lengthy, red-tape-filled process.

Is this the sneaky reason Congress wants marijuana to remain illegal?

However, there's another reason Congress might be choosing to keep marijuana's scheduling unchanged, despite popular opinion: taxes. That's right, it may come down to the almighty dollar.

You're probably puzzled right now, because the popular belief is that legalizing marijuana would open the door for states and the federal government to tax pot and reap the rewards of legal-channel sales. Taxes are a big reason that California, a state that has regularly run a budget deficit, pushed to legalize weed. Even though the taxation of cannabis isn't going to singlehandedly eliminate budget gaps at the state or federal level, it's a quick way to generate additional revenue and shrink any existing or future deficits.

But the federal government could actually benefit more by leaving things the way they are now.

You see, section 280E of the U.S. tax code, which was implemented in the early 1980s to stick it to drug traffickers, prevents businesses that sell a federally illicit Schedule I drug, or highly restricted but legal Schedule II substance, from taking normal corporate income tax deductions . With the exception of cost of goods, which typically represents a small percentage of expenses, businesses are unable to take any additional deductions. If profitable, this can lead to an effective tax rate perhaps as high as 70% to 90%! Expansion at the state level with effective tax rates this high could provide the federal government with more annual tax revenue than if the drug were legalized and taxed at a lower rate.

Back in early December, when Republicans in the Senate were refining the Tax Cuts and Jobs Act just weeks before its eventual passage, Senator Cory Gardner, a Republican from Colorado (where pot is legal), introduced an amendment that would have allowed marijuana-based businesses that were complying with state law to take normal corporate deductions on their federal income tax return. Gardner briefly attempted to use this amendment as leverage to earn his vote in favor of the Tax Cuts and Jobs Act, but wound up dropping his push shortly thereafter.

The reason? Aside from little expected support among senators, allowing marijuana businesses to take normal deductions was expected to cost the federal government $5 billion in tax revenue over the next decade.

As I said, it's all about the money.

While I certainly can't prove that this is the big sticking point on Capitol Hill, it's likely to be a difficult hurdle for the industry to overcome.

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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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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