Cannabis Overhaul in Washington Is Only Getting Harder
Legalization agenda could be complicated by states that want to defend their nascent marijuana industries and associated tax revenues
By Carol Ryan Follow
Wall Street Journal
Dec. 28, 2021 8:00 am ET
Investors need to brace for more political wrangling over cannabis. Some states that already permit the drug could be unexpected holdouts to full federal legalization.
American pot stocks haven’t had a good year. Despite rising in January and February, when the Democrats took control of the U.S. Senate and WallStreetBets traders piled into pot stocks, the AdvisorShares Pure Cannabis ETF YOLO -1.83% —one of the larger funds tracking the sector—is down 23% year to date. Federal bills have been introduced by both Democrats and Republicans in recent months, but haven’t helped share prices as no one expects them to pass.
The longer federal legalization takes, the messier it will be. To date, 18 states have legal adult-use cannabis industries, according to the latest tally from the Marijuana Policy Project. As the drug can’t be transported across state borders while it is still federally outlawed, anything that is smoked within a state has to be grown and sold locally. These independent fiefs, which are growing bigger every month, would be disrupted by national legalization.
One of the biggest concerns is what happens when cannabis can be traded across the country. More mature marijuana markets such as California and Oregon see interstate commerce as an opportunity to get excess stock off their hands. For recent converts such as New York and New Jersey, a gush of cheap outside inventory would be a threat to their nascent industries. This is particularly sensitive for small, minority-owned cannabis businesses that are being given priority for licenses but would be rapidly undercut.
States also want to protect the tax windfall that cannabis creates. Illinois has collected more taxes from cannabis than liquor every month since February, according to the Illinois Department of Revenue. Since 2014, when legal sales began in Colorado and Washington, cannabis has raised $7.9 billion in taxes for states, according to the Marijuana Policy Project. Sales levies should stay with local markets, but those associated with production could be hard for certain states to hold on to if the drug is federally legal. Cultivation is likely to shift to warm and low-cost states where cannabis can be grown cheaply outdoors.
Washington will also want a piece of the tax pie. A bill introduced by Senate Majority Leader Chuck Schumer this summer proposes a 10% levy that will increase to 25% within five years. This is tricky for states such as California and Washington that have effective tax rates of 36% and 47%, respectively, and already find it hard to compete with the black market, according to MPG Consulting. An alternative bill introduced by Republican congresswoman Nancy Mace proposes a lower 3% federal excise tax. “The federal government is coming in late…The worst thing it could do is cause a setback in the [legal] states,” says Ulrik Boesen, senior analyst at the Tax Foundation.
According to a recent paper by Profs. Scott Bloomberg of University of Maine School of Law and Robert Mikos of Vanderbilt Law School, one option is to lift the federal ban on cannabis but suspend the so-called Dormant Commerce Clause, a constitutional doctrine that limits states’ ability to restrict interstate commerce. The move has precedent—the insurance industry is exempt, for instance—but would be controversial, especially among western states likely to benefit from a free-flowing national cannabis market.
This year has left investors disillusioned by how long federal cannabis change is taking. Next year might not be much better.
Write to Carol Ryan at carol.ryan@wsj.com
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Appeared in the December 29, 2021, print edition as 'Cannabis Overhaul in Washington Gets Harder.'
Cannabis Overhaul in Washington Is Only Getting Harder - WSJ |
