The decriminalization and licensing of marijuana in North America – Part I
Who wants a billion dollars?
I love a payday. If I can find one that incurs almost no risk, then I’m on it like a broken-hearted teenage girl on chocolate.
Government thinks like that, too. Revenue good, risk bad. And that’s why it’s inevitable that marijuana will be decriminalized and licenced in North America.
Decriminalization and licencing are two very different concepts. Decriminalization is a criminal concept. That means the government removes the existing laws that makes it illegal to grow / harvest / transport / consume marijuana. Licencing is a civil concept, like driving a car or running a restaurant. It means you can do it if someone in the supply chain has paid a fee to the state and is deemed worthy to carry on that act.
Colorado and Washington have mostly decriminalized cannabis. By oil or flake or smoke or in your favorite brownie recipe, the governments there won’t put you in jail for consuming it. However, those two states have also created a licencing process for the sale of cannabis, just like there is a licencing process for the sale of alcohol or homes or used cars. Someone pays a fee to the government for the right to take part in the supply chain, and the end purchasers pay sales tax at the point of sale.
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When it comes to marijuana, the amount of that sales tax is staggering. In one month, Colorado earned over $2,000,000 in taxes from the marijuana sector. Gov. John Hickenlooper (former mayor of Denver) expects the sales from both legal medical and recreational marijuana in the state will reach nearly $1,000,000,000 (yes, billion) in the next fiscal year, with the state collecting roughly $134 million in taxes and fees.
Economists estimate that the same industry could boost Washington state’s tax revenue by $25 million by July, 2015, with an estimated $200 million increase by mid-2017.
Some interesting research by NerdWallet (see the infogram) suggests the annual tax revenue for all states combined could soon be over $3 billion. Just California’s piece of that tax revenue would be equal to that state’s annual Parks expense.
It’s not just the USA that sees easy tax revenue coming. Canada is moving towards a model of authorized medical marijuana, despite some false starts and government backlogs. Estimates of the size of the Canadian market and the price per gram vary, but the most reliable pins the average annual usage of medical marijuana per patient at 1 kilogram a quarter, or 4 kilograms a year (4 kilos = almost 9 pounds). At a price of $5 per gram, that works out to roughly $20,000 in gross sales per year, per patient.
Projections have 450,000 Canadians puffing, chewing and oiling their way to marijuana-fueled health by 2018. At $20,000 per patient, that’s a total annual medical market of nine billion dollars, in a population of 32,000,000. (For comparison, California has roughly 38 million people.)
For revenue to the government, note that Canada charges a value added tax called the HST, which most provinces blend out to 13%. Thirteen per cent of nine billion is a little over $1.1B in tax revenue, to be shared annually by the federal government and the provinces.
Who wants a billion dollars?
But that’s only part of the math. When decriminalization arrives, you must consider the government funds that won’t be spent on law enforcement, prison and the courts prosecuting marijuana users. Estimates of this range from $2B to $17B (!!!) depending upon who is doing the math and what assumptions they use. Regardless of the actual number, the savings will be huge, leaving more cash for other parts of the government budget.
Finally, from a softer social perspective, there is research showing a causal link between decriminalization of cannabis and government savings. Portugal (not the Netherlands) has the most liberal drug policies in Europe. A major research paper published in 2009 found that in the five years after personal possession was decriminalized, illegal drug use among teens in Portugal declined, rates of new HIV infections caused by sharing of dirty needles dropped, and the number of people seeking treatment for drug addiction more than doubled. It’s cheaper for a government to offer treatment for drug addiction than to treat HIV – another major financial win!
It’s safe to say the money part of the equation is fairly well established. What about the risk part?
I see almost no risk to politicians in supporting decriminalization. Good politicians can smell what’s in the wind, and here that smell is the sticky sweet odor of their constituents happily smoking away. I’ve yet to read a reputable poll that shows popular support for continued criminalization. It would be political suicide for a middle-of-the-road elected representative to vote against this.
With the decision made, the next problem is execution. How does government implement that decision? The easiest path to decriminalization is to start with the medical side – exactly what Canada has done and what 23 states have done. The politicians appeal first to our emotional side, and it’s no surprise that the pro-cannabis advocates always display the blameless cute children, migraine sufferers and cancer victims. Those 23 states have authorized a medical professional to in essence write a prescription for cannabis, with another 3 states having similar legislation in process.
Despite what the Deadheads will tell you, cannabis can be harmful. How do we know this? First, there is no third party empiric study conclusively proving causation between cannabis and any ailment. There is a great deal of anecdotal evidence, but just like with St. John’s Wort and echinacea, the science is suggested, not quantified. Second, the cannabis industry, like most nascent industries, has not yet developed best practices. Mice poop, mold, bacteria and other forms of contamination are not unusual, which means the end user is at risk of an impure product.
Politicians reduce their exposure to a bad product by sloughing it off onto the medical profession. Minnesota seems to be the most extreme – there the patient can legally consume the cannabis only in the presence of a medical professional. Unless you have a family member or good friend or neighbor in the industry, that means you have to get to the office every time you need medical treatment. For the migraine sufferers, that can mean 20 trips a day. Minnesota’s model needs work.
Don’t think that’s an exaggeration. A business contact of mine got into the cannabis industry because of his cluster migraines. Some days, he claims, it takes up to 20 joints to let him function like a normal human being. But if he’s smoking that many a day, why doesn’t he look like an extra from Ridgemont High?
The difference is in the THC levels. That’s the chemical ingredient that induces the effects you normally associate with cannabis. Since it doesn’t appear that the THC has any medical benefit, logic tells us that the best medical cannabis would have almost no TCH while still retaining the other key ingredients that make cannabis cannabis.
That’s theory. The practical proof of this can be found by browsing through websites belonging to the medical marijuana growers. There you’ll see claims of medical efficacy and no THC. The growers are delivering what the consumers want, just as the politicians are. That’s why my business associate can smoke 20 a day and still function. That’s why we’re looking at the end of marijuana Prohibition.
After wanting to be with us all day and all of the night, in 1981 The Kinks said “Give the People What They Want”. That’s what our election officials are doing. We want balanced budgets, they see low hanging tax revenue. We want decriminalization, they see their voters pushing a social movement.
With minimal risk tied to easy tax revenue, it’s an easy macro decision to make. Count on more governments around the world giving more consumers access to cannabis, whether medical or recreational. That’s how markets are created – ask Peter Schiff (see How an Economy Grows and Why it Crashes – 2010).
So that’s part 1. Decriminalization and licencing are inevitable. Take that as a fact.
But what does it mean to the average investor? That’ll be in part 2.
Note from the Publisher: Special thank you to NerdWallet’s graphic and Intel that Peter utilizes above. The source may be accessed, by clicking here.
Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>