Federal Pot Decriminalization & What It Means For American Businesses

Pot Decriminalization

On December 4, 2020, the Democrat-controlled House of Representatives passed a bill on pot decriminalization at the federal level. The unprecedented move — which is likely to die in the Republican-controlled Congress, though it may get passed if the Democrats are successful in flipping the Senate in the Georgia runoffs — will not only remove cannabis from the Federal Controlled Substances Act, but will move to expunge the records of those previously convicted of cannabis-based crimes.

While six House Democrats voted against the bill, five Republicans and one Independent backed the bill.

Proponents of the bill are touting it as a racial justice move, and while there is some validity to this assessment, the bill — if it passes — will serve as a touchstone in American businesses.

And the ripple effect will be felt in more ways than one.

Federal Pot Decriminalization & The Economic Impact

As of this writing, 36 states have legalized marijuana for medical use. And of the 15 states that have already legalized marijuana, four of them — New Jersey, Arizona, Montana, and South Dakota — have done so during the 2020 election.

Pot Decriminalization

Previous efforts at federal pot decriminalization have failed for a variety of reasons, but at its crux, it has to do with state’s rights.

From an investment standpoint, as well, the failure to decriminalize pot on the federal level has had an impact on marijuana stocks.

But according to The Motley Fool, there’s a bigger reason why federal pot decriminalization hasn’t been a viable possibility for Capitol Hill: because it would create a money flow problem for Congress.

“Cannabis-focused businesses in the U.S. are subject to Section 280E of the U.S. tax code because marijuana is a Schedule I substance. This tax code disallows businesses that sell a federally illicit substance from taking normal corporate income tax deductions, save for the cost of goods sold. In effect, it legally allows the federal government to collect an exceptionally high-income tax rate from profitable pot companies,” they write.

“If weed were suddenly legalized in the U.S., cannabis companies would no longer be bound by 280E. This would be great news for pot companies looking to hire new workers and reinvest in their business, but it would lead to an estimated $5 billion reduction in revenue for the federal government over the next decade.

Congress could always look to institute a federal tax to generate additional revenue, but such a move would only widen the gap between legal and black-market pot, thereby strengthening the black market.”

Pot Decriminalization

So, if Congress does indeed pass the proposed bill, it would most likely impose a federal tax on all marijuana-based businesses to make up for the economic shortfall.

This, too, may put minority-owned pot businesses in a precarious position — especially if they’re already struggling with such things as overhead, inventory, and the other expenses associated with running a legitimate pot business.

The question of federal pot decriminalization as a social justice move, then, is one that remains in the air.

Was the federal government really hoping to “make things right” for Black, LatinX, and other minority groups who were unfairly subjected to draconian pot laws — or were they hoping to make up the financial shortfall with a modern excise tax?

What Are The Other Financial Implications?

Aside from the impact on the criminal justice system — which is long overdue — federal pot decriminalization will impact businesses in other ways.

The COVID-19 pandemic continues to ravage the economy, and with (as of this writing) stimulus bills in limbo and no clear path to economic recovery from the incoming Biden administration (yet), states are desperate to get their individual economies up and running.

Decriminalization — and, more saliently, full-blown legalization — carries great potential, especially as other industries (such as the restaurant industry) are nearly rendered redundant.

And, according to the Tax Foundation, the legal pot industry has proven a boon to states like Colorado and Washington. If the trends continue nationwide, it could mean a great economic revolution for the United States.

“Marijuana tax collections in Colorado and Washington have exceeded initial estimates, and a nationwide legalization-and-tax regime could see states raise billions of dollars per year in marijuana tax revenue,” they report.

What’s more, pot decriminalization will also lead to job growth — which is especially salient for gig workers who have lost their jobs due to the pandemic. According to Leafly, 2018 was a banner year for the cannabis industry, with $11 billion in sales and more than 200,000 jobs created in states that fully legalized the drug.

For now, however, we are a long way away from federal pot decriminalization, let alone pot legalization on a nationwide level.

As the Center for American Progress points out, “Decriminalization means that the possession of small amounts of marijuana will trigger lower or no criminal penalties, although fines and citations may still be levied.

In New York, for example, the possession of a small amount of marijuana for recreational use will not lead to an arrest, but the state criminalizes marijuana consumption in public view.”

Until pot is fully legalized nationwide, states will have to content themselves with obtaining revenue from fines and levies, and — in more extreme cases — arrests and incarceration.

And that, of course, opens up the Pandora’s box of the for-profit prison industrial complex — which opens up the other Pandora’s box of racial justice — and you realize it’s all connected in the end.

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