The Money in Mary Jane

States, investors and politicians are seeing dollar signs in the legalized marijuana market. What should you know?

Five Figures to Consider

$6.7 billion U.S. legal marijuana market
27% expected compound annual growth rate
$793 million tax revenue from marijuana business in 5 states with legalized, recreational marijuana in 2017
64% of Americans support legalizing marijuana, including 51% of Republicans
1,100 marijuana start-ups looking for investors on angel.co

Hooch. Broccoli. Bud. Mary Jane. Santa Semilla. If it is not there already, legalized marijuana is coming to your neighborhood. It won’t be in a nickel bag, but rather packaged as a sparkling cherry tonic, an antioxidant-rich oil or a watermelon sour gummy. You might inhale it with a vape pen, put a drop under your tongue or rub a marijuana ointment on your sore back. What will the effects be? State tax revenues will go up. Marijuana possession arrests will go down. Some investors will become wealthy. Adult usage will rise, along with marijuana-related emergency room visits and car accidents. Will there be health benefits? Possibly. The classification of marijuana as a Schedule 1 drug has effectively put a ban on research on the 400 chemicals present in the marijuana plant, so the evidence in most cases is inconclusive.

For signs of the coming marijuana wave, look to current and former congressional leaders. This week Republican Senate Majority Leader Mitch McConnell, who’s not known as a fan of controlled substances, succeeded in placing language legalizing the cultivation of hemp into the Farm Bill. If passed, hemp would be federally reclassified, and states could approve the production of hemp without fear of federal interference. Hemp is defined as marijuana with less than 0.3% delta-9-THC, the psychoactive cannabinoid that gives the characteristic marijuana high. Kentucky farmers represented by McConnell want to grow hemp for its concentration of cannabidiol (CBD), a cannabinoid believed to have anti-inflammatory effects. In November the FDA sent warning letters to four companies that advertised their CBD products as effective treatments for cancer saying that such “deceptive marketing” could lead people to avoid proven treatments. Advertising CBD for pain and inflammation, however, hasn’t attracted censure, and CBD gummies, lotions and oils line the shelves of marijuana dispensaries. Another new Republican bud booster is former Speaker of the House John Boehner who joined the advisory board of marijuana grower and dispensary operator Acreage Holdings. In April Boehner appeared on CNBC’s Squawk Box to complain about the federal restrictions on the nascent marijuana industry saying, “The federal government ought to get the hell out of the way.”  Prominent Democrats support legalization, too. In April Senate Minority Leader Chuck Schumer announced his support, and Senators Ron Wyden, Kirsten Gillibrand and Bernie Sanders are cosponsors of Cory Booker’s Marijuana Justice Act.  

Political motivations for pot legalization range from reducing arrests of non-violent marijuana users, especially African-Americans, to providing PTSD relief to veterans and from disempowering drug cartels to reducing opioid addiction. But there’s nothing like money to amplify those social justice arguments. The size of the U.S. legal marijuana market is estimated at $6.7 billion according to a report by Arcview Market Research and BDS Analytics, and the illicit market is reportedly six times as large. Arcview and BDS estimate that the legal market will grow at a compound annual rate of 27% over the next five years with the market for edibles alone reaching $14.9 billion by 2021. In the five states that had approved recreational marijuana in 2017, state tax revenues were a combined $793 million. California, which opened recreational use in January, is expected to pull in $600 million in tax revenue from marijuana sales this year. More states would like a bite of the marijuana pie. New Jersey Governor Paul Murphy is counting on $60 million in tax revenue from recreational marijuana in his 2019 budget – even though recreational marijuana isn’t approved in New Jersey yet –  and a reduction of $140 million in expenses related to low-level marijuana prosecutions. This month New York State Governor Andrew Cuomo switched sides and came out in favor of legalization in the Empire State, too. States with legal, recreational marijuana have invested large portions of their tax revenue into public schools.

Currently 46 states allow some medical marijuana use, and 8 states plus Washington, D.C. have legalized adult, recreational use. While states have approved medical marijuana to treat seizures, spasms and chronic pain, there are only two FDA approved uses. Marinol, a synthetic version of THC is approved for the treatment of chemotherapy side-effects in cancer patients and appetite stimulation in AIDs patients. While there are promising links between marijuana legalization and a reduction in opioid addiction, more research must be done to understand the relationship better. Indeed, a need for more research was the overwhelming conclusion of a 2017 report on marijuana by the National Academies of the Sciences. Research is difficult, however, while the federal government classifies marijuana as a Schedule 1 drug.

The Schedule 1 classification also creates financial challenges for marijuana entrepreneurs. Because of a law known as 280E marijuana processors and dispensary operators can’t deduct business expenses on their federal tax returns. As a result, marijuana businesses pay a tax rate of about 70%, compared with 21% for other U.S. businesses. That high rate makes it difficult for legal marijuana operators  to compete with illicit ones on price. Financing is another challenge. National banks will not service marijuana businesses for fear of breaking federal laws. As a result, business owners operate in cash, making payroll, tax payments, rent payments and material purchases with greenbacks, putting owners at risk of theft and inviting an underpayment of taxes.

While no death from marijuana overdose has been reported, its effects are serious enough to have sent many to the hospital emergency room. This is especially true for edibles, which are expected to be the fastest growing niche in the marijuana market. Smoked marijuana, which is higher in THC today than it used to be, has an almost immediate effect, which helps people monitor their intake. With edibles, users don’t feel the effects for an hour or more, and those effects, which the user is helpless to mitigate, can last for hours longer. High doses of THC can cause mental confusion, panic reactions and hallucinations. Even low doses impair perception and coordination, which interferes with one’s ability to drive. The automobile club AAA is working to educate officers to identify driving while impaired by marijuana. Currently there is no effective standard of measurement. (For evidence of marijuana’s negative impact on driving, consider the spike in traffic accidents on April 20th, the annual marijuana celebration day.) Long-term marijuana use is associated with depression, an increased risk of schizophrenia and other psychotic disorders, especially for teens that are genetically predisposed. About 1 in 10 marijuana users will become addicted. For people who begin using before the age of 18, that number rises to 1 in 6.

Still, the money flows. Arcview Group has made a business of bringing together marijuana investors and marijuana entrepreneurs. It boasts that its 600 investors have put $180 million into 175 marijuana ventures including software companies Flowhub and MJ Freeway, device companies Dipstick Vapes and Cannakorp and cannabis-infused drinkmaker Mirth. The angel investment website angel.co lists 1,100 marijuana start-ups looking for funding, and Similar Web reports that Weedmaps, known as the Craigslist of cannabis, had 5.52 million visits in May. Big Pharma doesn’t want to miss out. According to Business Insider, Johnson & Johnson has accepted two marijuana companies into its incubator in Canada, where marijuana is now legal.

According to a recent Gallup poll, 64% of Americans (including 51% of Republicans) support marijuana legalization. While this means revenue for states and income for marijuana investors, for the general public it means some increased risks. The money is getting ahead of the science and federal law.

FIVE FIGURE THINKING
The contradiction between federal and state laws related to marijuana is untenable. We need research into both the benefits and the risks of marijuana as well as a cautious marijuana policy that eliminates prosecutions of marijuana users, supports a legal marijuana industry, protects children and treats addiction.

Sources

AAA, Arcview Group, BDS Analytics, CDC, congress.gov, DEA, Drug Policy Alliance, FDA, National Academy of Sciences, National Cannabis Industry Association, Rand Corporation, the State of New Jersey