Marijuana Bill Debate Could Open Door to SAFE Banking Act
Cannabis stocks recently rallied on news that the long-awaited U.S. Senate bill to federally legalize marijuana was going to be tabled in the legislature. It finally happened on July 21.
The Cannabis Administration and Opportunity Act was drafted by Senate Majority Leader Chuck Schumer and Democratic Senators Cory Booker and Ron Wyden. The sweeping legislation would lift federal prohibitions on cannabis more than 50 years after Congress made the substance illegal.
Among other things, the legislation would remove marijuana from the list of drugs penalized in the Controlled Substances Act. It would also allow states to set their own cannabis laws without fear of punishment from Washington. (Source: “Cannabis Administration & Opportunity Act,” Senate Democrats, July 21, 2022.)
The bill includes an excise tax for small and mid-sized businesses beginning at five percent and gradually increasing to 12.5% after five years. For large businesses, the tax would begin at 10% and increase to a maximum of 25%.
The tax revenue would be used to invest in communities and individuals that have been the most harmed by law enforcement campaigns against drugs, as well as to support legal cannabis businesses.
The Cannabis Administration and Opportunity Act would also expunge nonviolent marijuana-related convictions from criminal records.
The odds that this marijuana bill will get enacted aren’t great. To pass, it needs the support of all Senate Democrats and 10 Senate Republicans. Currently, there are three Democratic senators who are wavering on their support for the bill. (Source: “Schumer’s Legal Weed Bill Is Finally Here,” Politico, July 21, 2022.)
While the Cannabis Administration and Opportunity Act is unlikely to pass in its current form, it does open the door for deliberation, which could point to some kind of reform over the next 12 months.
Reform is, at the very least, warranted. Support in the U.S. for marijuana legalization is at record levels. In a 2021 report, 60% of U.S. adults said cannabis should be legal for both recreational and medical use, and 31% of U.S. adults said it should be legal for medical use only. (Source: “Americans Overwhelmingly Say Marijuana Should Be Legal for Recreational or Medical Use,” Pew Research Center, April 16, 2021.)
Just eight percent of U.S. adults in the 2021 report said marijuana shouldn’t be legal for use by adults.
The Democrats are more than a little desperate to get their marijuana legislation passed. After all, on the campaign trail, they waxed eloquent on how they were the only party that could get federal legalization of cannabis across the finish line.
Lacking the number of votes to pass its sweeping marijuana decriminalization bill means the Senate Democrats will need to look for compromises. This could include adding provisions to allow financial institutions to provide banking services to the cannabis industry.
Those kinds of provisions appear in another bill, the SAFE Banking Act, which has been passed by the House and received by the Senate. Even getting that bill adopted would be a big step for cannabis stocks. The SAFE Banking Act cuts the red tape that prevents marijuana companies from accessing traditional banking.
The SAFE Banking Act would also put a lot more money into the pockets of cannabis companies.
Section 280E of the tax code prevents cannabis companies from deducting any business expenses. That section was put in place to target illegal drug dealers, but as written, it also punishes cannabis companies that are licensed as legal businesses in their individual states. (Source: “26 U.S. Code § 280E – Expenditures in Connection With the Illegal Sale of Drugs,” last accessed July 26, 2022.)
As a result, U.S. marijuana companies pay very high taxes, up to 70% of their income. Whereas other businesses in the U.S. can deduct common expenses like salaries, utilities, health insurance, marketing/advertising, repairs/maintenance, rent, and contractors, cannabis companies cannot.
Analyst Take
Congress still has a lot of work to do this year, and there’s a good chance the Democrats could lose the House in the fall’s midterm election. With their jobs on the line, many federal Democrats are looking for a way to get a weed bill passed this year.
While the Cannabis Administration and Opportunity Act may not get passed as it currently stands, the passing of the SAFE Banking Act would still be a major accomplishment, one that would benefit virtually every U.S. cannabis stock.
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