Baby steps in marijuana legalization
By: Charles Freeman
The public support for legalizing marijuana continues to grow, but federal legalization is still probably years away. Pro-legal majority opinions now exist not only across demographic generations but also across political lines. Republicans have recently crossed over the 50% line in supporting national legalization, an important milestone for the industry. The interesting observation is that this support comes at a time when our nation is arguably in one of the most politically polarizing states in our history. Republicans and Democrats are at each other’s throats daily. Granted, there have always been disagreements about how to run our country. However, to accomplish anything, opposing parties must find a way to compromise and come together to meet somewhere in the middle.
The legal marijuana industry is one of the fastest-growing sectors in our country right now. Yet, the industry is burdened with massive conflicts between federal, state, and local laws. Legal cannabis companies operate under a cloud as their business is technically working in violation of federal laws. They are not allowed to deduct expenses due to obscure IRS rules. They do not have access to traditional forms of banking and lending because marijuana is still listed on Schedule 1 of the Controlled Substances Act, and so many operate as “cash only” businesses. Yet, in spite of these limitations, the industry continues to expand.
This chart clearly shows that there is a massive interest by Congress to resolve these issues. The good news is that some of these bills are finally being given a chance to get to the floor for a vote. For years, even though marijuana reform bills were introduced, they were either not given serious consideration or were blocked due to the political agenda of a representative. But the tide has turned. Not only is there interest, but also marijuana reform legislation is one of the few things both parties seem amenable to.
So where are we in the legislative process? Some bills are asking for full federal legalization and broad reform, while others are taking a narrower route. The problem with a comprehensive federal legalization attempt right now is that, in my view, you’re asking for too much, too soon. There are considerations regarding decriminalization efforts, lack of scientific research, and FDA guidance (to only name a few). The key is to take “baby steps” to get to a broader legalization bill later. The most manageable issue appears to be resolving the problems around banking access for cannabis companies.
Banks and other ancillary businesses servicing the cannabis industry, to date, have been hesitant to offer products and services because of the fear in violating federal law (federal money laundering, trafficking, etc.). Now some financial institutions have chosen to take this risk because of the “non-enforcement” stance the federal government has taken in states where marijuana has been legalized. But the fear still remains a massive headwind.
The Secure and Fair Enforcement (SAFE) Banking Act intends to address this fear by reassuring banks they can do business with cannabis companies without risking prosecution from the federal government. The Act would essentially eliminate the need for companies to do business only in cash, allow credit card transactions, open lending options to the companies, and make it easier to do business across the supply chain.
Rep. Ed Perlmutter, D-Co., and Rep. Denny Heck, D-Wash., introduced the SAFE Act back in March and there is a companion bill in the Senate. Recently, the Senate Committee on Banking, Housing, and Urban Affairs had a hearing on the Act for testimony regarding the challenges cannabis companies face in states where marijuana is legal. Of note, only one Republican (Mike Crapo, R-Idaho) attended the meeting. This could be because of other obligations for committee Republicans, or it could be due to the delicate line Republicans are walking between conservative views and the need for reform.
While Republican support is far less than Democrats and Independents in national surveys, I still think there could be enough to get something like the SAFE Act passed. By isolating this issue (i.e., access to bank services), it should be easier to come to a bipartisan agreement. Clearly, it will help everyone in the industry – companies, employees, suppliers, consumers – but it also massively helps the banks. Banks have struggled since the real estate crash (I’m not saying they shouldn’t have given what happened and their responsibility in that fiasco). A low-interest-rate environment also makes it particularly challenging to maintain profitability for financial institutions. Here’s an opportunity: Demand for lending is off the charts as the legal cannabis industry is in its infancy, and banks could easily provide the supply. It’s a win-win for both industries.
So, by isolating different aspects affecting the broader legal cannabis industry, such as commerce headwinds, decriminalization, medical solutions, and drafting legislation for those particular issues uniquely; incremental progress could be made in legalization efforts. Eventually, enough progress is made that full federal legalization and regulation just makes sense. I think the SAFE Act has a good chance of passing this year and could set a precedent for future bipartisan bills.