Failure to pass comprehensive federal cannabis reform will cause continued decline in the value of cannabis companies and fuel an already emboldened black market industry. There are currently 44 states with some form of cannabis legalization — and additional legalization on the horizon. The cannabis industry has grown to over a $40 billion dollar industry with significant tax dollars going to the states and the federal government. So why is cannabis reform taking so long and what is the result of failed legislation?
Cannabis business valuations, including the top multi-state operators, have declined more than 90% due in part to federal legislators’ failure to pass comprehensive cannabis reform — more specifically safe banking reform. At the end of the 2022 congressional session, the SAFE Banking Act, which allows for cannabis banking, was pulled from the omnibus spending bill, resulting in a steep decline in the industry. The result of Congress’ repeated failure to reform the cannabis laws, in combination with the economy’s decline, impacted revenue and access to necessary capital for operations and growth within the industry. Because of federal laws criminalizing cannabis as a Schedule I controlled substance, companies are generally prohibited from banking and gaining access to traditional financing available to other industries. Furthermore, because of continued criminalization, cannabis companies are subject to the regulations of the IRS Code Section 280E, which precludes retail operations from taking advantage of traditional tax write-offs afforded to other companies — specifically, the inability to deduct operational expenses. This tax burden, along with added excise tax on the wholesale operations, has weighed heavy on the industries survival.
The added tax liabilities, along with the inability to access affordable capital, has threated the industry and given an advantage to black market sales, a subset of the industry that occupies at least 20% of cannabis sales. Illegal production and sales of cannabis offer the customer a cheaper alternative to the legal cannabis experience. The unregulated, illegal market jeopardizes the legal industry by introducing unsafe, untested products into the market. This plays into the opposition’s narrative that cannabis is unsafe and threatens the research and development of the benefits of responsible cannabis use. It is further complicated by the lack of enforcement by government agencies over illegal sales and operations.
It is also imperative that continued research and development of cannabis use continues. The Mayo Clinic recently dedicated an issue of its magazine to the science and benefits of medical marijuana. The magazine focused on the research and use of cannabis properties for relieving pain, easing anxiety, improving sleep along with many uses of CBD. Comprehensive cannabis reform will allow for continued research into the science of cannabis and its benefits.
It is imperative that cannabis reform starts with SAFE Banking and eases into federal legalization. Federal legalization raises debate over interstate versus intrastate commerce. This discussion creates an independent threat to the industry which necessitates further analysis and consideration. In the meantime, access to banking and capital markets is imperative to the nascent cannabis industry, necessitating the passage of the SAFE Banking Act.