Cannabis Legalization Inches Forward After Biden Pardons Federal Offenses
Meaningful steps toward marijuana legalization were made after President Joe Biden recently announced that he would be pardoning all federal offenses of criminal marijuana possession.
“As I’ve said before, no one should be in jail for using or possessing marijuana. Today, I’m taking steps to end our failed approach,” wrote Biden. (Source: “Twitter post,” Joe Biden, October 6, 2022.)
In addition to pardoning federal criminal cannabis possession offenses, Biden encouraged state governors to take similar steps, which would potentially affect thousands more Americans.
In 2021, five states (Connecticut, New Jersey, New Mexico, New York, and Virginia) passed legislation to legalize recreational marijuana.
Five more states are set to decide on legalizing recreational cannabis during the November midterm elections: Arkansas, Maryland, Missouri, North Dakota, and South Dakota. If those states legalize recreational marijuana, about half of the U.S. population will reside in a jurisdiction with recreational cannabis legalization. (Source: “Voters in Five States to Decide on Legalizing Weed This November,” Forbes, October 3, 2022.)
Biden also said he would request the Department of Health and Human Services and Attorney General Merrick Garland to “expeditiously” review how marijuana is scheduled under federal law.
Cannabis is still a Schedule I narcotic under the Controlled Substances Act, meaning it’s viewed as having “no accepted medical use and a high potential for abuse.” This scheduling puts it in the same category as heroin, LSD, and ecstasy. (Source: “Drug Scheduling,” United States Drug Enforcement Administration, last accessed October 18, 2022.)
“…We classify marijuana at the same level as heroin – and more serious than fentanyl. It makes no sense. I’m asking [Secretary Xavier Becerra] and the Attorney General to initiate the process of reviewing how marijuana is scheduled under federal law,” wrote Biden. (Source, “Twitter post,” Joe Biden, October 6, 2022.)
Biden’s announcement follows a campaign pledge in which he said no one should be in jail for smoking marijuana. (Source: “Joe Biden Supports Decriminalizing Marijuana, Stops Short of Calling for Legalization,” CNN, May 16, 2019.)
Cannabis Stocks Rally
While Biden didn’t endorse decriminalization, his announcement at least moved the needle on marijuana legalization.
That was more than enough to juice marijuana stocks. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ), which is the world’s largest marijuana exchange-traded fund, shot up by 30%, while the AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) jumped by 49%.
Individual cannabis stocks also spiked. Cresco Labs Inc (CNSX:CL, OTCMKTS:CRLBF) rallied by 24%, Canopy Growth Corp (NASDAQ:CGC) advanced 30%, Tilray Inc (NASDAQ:TLRY) surged by 40%, Marimed Inc (CNSX:MRMD, OTCMKTS:MRMD) rocketed by 61%, and Jushi Holdings Inc (CNSX:JUSH, OTCMKTS:JUSHF) exploded by 70%.
While those marijuana stocks have since given up some of their gains, most are still trading higher than they were before Biden’s announcement.
Record Number of Americans Support Marijuana Legalization
Biden’s initial reluctance to even pardon federal offenses of criminal marijuana possession isn’t a total surprise.
This is the same person who, in 1982, pushed President Ronald Reagan to create the Office of National Drug Control Policy, the head of which is referred to as the “drug czar.” (Source: “U.S. Plans a New Drive on Narcotics,” The New York Times, October 9, 1982.)
Fast-forward 40 years and Biden has changed his tune. As a politician, it can’t be lost on him that support in the U.S. for marijuana legalization is at record levels.
A 2021 report showed that 60% of U.S. adults said marijuana should be legal for both medical and recreational use, and 31% of U.S. adults said it should be legal for medical use only. Just eight percent of U.S. adults said marijuana shouldn’t be legal for use at all. (Source: “Americans Overwhelmingly Say Marijuana Should Be Legal for Recreational or Medical Use,” Pew Research Center, April 16, 2021.)
Many Americans from both sides of the political aisle applauded Biden’s announcement, but not everyone. Republican Senator Tom Cotton wrote that it was a “desperate attempt to distract from failed leadership.” (Source: “Twitter post,” Tom Cotton, October 6, 2022.)
Meanwhile, Republican Representative Nancy Mace wrote, “Applaud the Administration for their necessary big step forward in bringing justice to so many.” (Source: “Twitter post,” Nancy Mace, October 6, 2022.)
Americans for Prosperity, a libertarian conservative advocacy group, also praised the move, saying it’s “a welcome first step in addressing the overcriminalization of cannabis.” The group said more needs to be done and that “Congress must act to end prohibition.” (Source: “AFP Praises Biden Administration Pardons for Cannabis Possession,” Americans for Prosperity, October 6, 2022.)
Benefits of Rescheduling Cannabis
If cannabis isn’t fully legalized at the federal level, moving it from Schedule I to Schedule II of the Controlled Substances Act—or removing it from the act altogether—would still be a big deal.
Section 280E of the U.S. tax code prevents marijuana companies from deducting business expenses. The law was put in place to target illegal drug dealers, but as written, it also includes cannabis companies that are licensed in individual states. (Source: “26 U.S. Code § 280E – Expenditures in Connection With the Illegal Sale of Drugs,” Cornell Law School, last accessed October 18, 2022.
As a result, U.S. marijuana companies pay very high taxes, up to 70% of their income. Meanwhile, other types of businesses can deduct common expenses such as salaries, utilities, health insurance premiums, marketing/advertising, repairs/maintenance, rental fees, and contractors.
Rescheduling cannabis under the Controlled Substances Act would result in marijuana companies being able to deduct operating expenses and improve their profitability, cash flow, and valuations.
Moreover, since marijuana is illegal at the federal level, it’s tough for cannabis companies to access traditional banking channels. In fact, most banks won’t touch marijuana companies because of the risks associated with federal laws and concerns about money laundering. This is why marijuana dispensaries don’t accept credit cards.
If marijuana is rescheduled under the Controlled Substances Act, it might be easier for the Secure and Fair Enforcement Banking Act of 2021 (SAFE Banking Act) to become law. That legislation would remove the risk of federal compliance in states where recreational cannabis is legal.
Changes to marijuana laws also mean mutual funds and other institutional investors could add cannabis stocks to their portfolios. Right now, marijuana stocks can’t be listed on major U.S. stock exchanges, which blocks many institutions from investing in cannabis stocks.
Analyst Take
Marijuana stocks have, for the most part, performed poorly because of federal U.S. marijuana legalization being stalled.
But Biden’s monumental decision to pardon federal offenses of criminal marijuana possession and to seek the rescheduling of marijuana in federal law could have a ripple effect, not just on U.S. cannabis stocks, but on marijuana stocks globally.
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