Article

NFIR - No Federal Intervention Rule gains traction

April 1, 2019

 

House Democrats will approve banking reform measure to shield states that allow cannabis sales, but Senate Republicans remain against it. Today, 33 U.S. states have legalized medical cannabis, 10 of which also allow adult-use of the drug. Further, Canada is one of only two countries worldwide to have legalized recreational weed, while Mexico gave the OK to medical pot in June 2017.

 

The Democrat-controlled House Rules Committee, and the broader House, are expected to take up discussion and bring up legislation for vote within the next several weeks that would protect legal states from federal intervention. House Rep. Jim McGovern (D-Mass.), chair of the Rules Committee,  said, “I can tell you in the House we will move on this issue [cannabis banking reform] in the next few weeks. It will come to the Rules Committee, which I'm the chair of, and we will guide it to the House floor for a vote. I think it will pass with an overwhelming vote -- Democrats and a lot of Republicans as well.

"We need to make sure that our federal laws don't obstruct what states are doing, especially with regard to banking issues where everything is being done in cash. ... We need to make sure that the federal laws respect what the states are doing.

"[A]nd I think that there's bipartisan support in the Senate on this as well, and whether it's the Warren-Gardner bill or another configuration I would expect something would happen this year. I think if we have a strong bipartisan vote [in the House] that'll increase the pressure on the Senate to do something."

Although McGovern's comments primarily revolve around getting cannabis businesses access to basic banking services, the broader implication of his stance suggests that House Democrats aim to draw a line in the sand whereby the federal government no longer imposes any controlled substance restrictions on states that have legalized marijuana.

As much as this might seem like a turning point for cannabis in the United States, even something as simple as banking reforms that protect state-level banking laws concerning the cannabis industry could be tough to pass. The hurdles with marijuana reform break down into three categories.

 

According to a recent October 2018 poll, an all-time record two out of three Americans wants to see marijuana legalized nationally. The marijuana movement in North America has come an incredibly long way in a relatively short amount of time. Looking back to 1995, not a single U.S. state had given the green light to medical marijuana, medical cannabis was still illegal to our north and south, and a mere 25% of surveyed adults by Gallup favored legalizing recreational weed. The idea of legalizing adult-use marijuana in the U.S. would have probably been met with laughter, rather than serious debate. Yet in spite of this momentum, the federal government has stood firm on its classification of cannabis as a Schedule I drug. As a Schedule I substance, cannabis is placed side by side with LSD and heroin as being entirely illicit, is not recognized as having any medical benefits, and is considered to be highly prone to abuse. Of course, this Schedule I classification has impacts that extend far beyond the drug's simply being illegal. For example, businesses that sell federally illicit controlled substances aren't allowed to take normal corporate income tax deductions per Section 280E of the U.S. tax code, save for cost of goods sold, which is often only a small percentage of sales. For profitable pot-based companies, this can lead to an effective tax rate of as high as 90%. With little leftover capital, it can be difficult for even the most successful weed-based companies to reorder product, expand, or hire new employees.

 

Furthermore, U.S. businesses involved in the cannabis industry often have limited or no access to basic financial services. Even with some states adding lengthy protections for financial institutions, banks simply don't want anything to do with the weed industry, leaving marijuana companies reliant on cash, which is both a growth restrictor and a security risk. Recent surveys would appear to suggest that the American public wants change, and House Democrats might just give them what they want.

First, there's the problem that Republicans have a markedly more negative view of cannabis than Democrats and independents. Although Gallup's 2018 survey did show that a slight majority of self-identified Republicans now favor legalization, the Republican-controlled Senate has been pretty clear that cannabis reform isn't a priority. Previous attempts to attach banking reform legislation as a rider to a bill coming up for vote have been blocked by Senate Majority Leader Mitch McConnell (R-Ky.). Thus, even with a bipartisan House vote, Senate Republicans may balk at the measure.

Second, folks have to realize that marijuana, while popular among enthusiasts, isn't a polarizing enough issue among voters to merit change as of yet. An April 2018 poll from the independent Quinnipiac University asked respondents whether they would still vote for a political candidate who they had a lot in common with, but differed on their view of cannabis. All told, 82% said yes, with just one in eight respondents saying no. This suggests that politicians aren't in any real danger of losing their elected seats over taking a minority stance on cannabis.

Third and finally, it's a money issue. If federal prohibition ends, Section 280E of the U.S. tax code would no longer apply. This would be fantastic news for cannabis companies operating in the United States, but it would actually reduce federal revenue by about $5 billion over the next 10 years. Essentially, not being able to charge a high effective tax rate, and thereby allowing normal corporate income tax deductions, would mean less taxable revenue collected by Washington.

 

There's no doubt that the U.S. could easily become the most lucrative marijuana market in the world if the federal government stepped out of the way.

 

 

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