More Good News for Those Who Want to See Marijuana Legalized

By Sean Williams Markets Fool.com


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As 2016 comes to a close, it can arguably be described as the best year ever for marijuana. At the beginning of the year, 23 states had legalized medical cannabis, while residents in just four states had voted in favor of legalizing recreational marijuana. By year's end, five new states had legalized medical pot, and another four had voted in favor of legalizing recreational weed.

The sales figures behind pot speak volumes of how far it has come and where it's expected to head next. According to investment firm Cowen & Co., the legal pot industry is worth about $6 billion at the moment. However, the opportunities for organic growth (pun intended), as well as expansion via new state approvals, could push the legal market size to an estimated $50 billion by 2026. This would imply a greater-than-23% compound annual growth rate for the next decade.

Colorado, which was one of the first two states to legalize recreational marijuana (along with the state of Washington) in 2012, wound up generating $135 million in licensing and tax revenue in 2015 from $996.2 million in legal pot sales. With sales once again trending higher in 2016, Colorado's weed revenue could be even greener this year.

Things are looking even better in California, where the passage of Prop 64 this past November could lead to $1 billion in additional tax revenue per year.

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Marijuana's opponents focus on adolescent exposure

Yet for all of the financial positives marijuana has brought to select states, there remains staunch opposition to its legalization. One of the most commonly referenced reasons why opponents to marijuana want it to remain illegal is the effect it might have on adolescents.

For instance, in 2015 a study published by Northwestern Medicine in the journal Hippocampus gave reason for caution. Northwestern's study examined daily marijuana users who began at age 16 or 17 and used marijuana for a period of three years; it then compared those users against same-age young adults who had never used marijuana. Researchers then conducted MRI scans on these individuals in their early twenties, noting that the heavy marijuana users were two years removed from their heavy use. The findings showed an oddly shaped hippocampus in heavy marijuana users, accompanied by an average long-term memory test score that was 18% lower than the non-users'.

Furthermore, asCBS News reported earlier this year, a 2016 study that examined admissions at Children's Hospital Colorado found that the rate of children treated for accidental marijuana edible ingestion essentially doubled. While instances of adolescent ingestion requiring treatment were rare, they jumped from a rate of 1.2 cases per 100,000 prior to legalization to 2.3 cases per 100,000 children treated two years after legalization.

Studies and findings like these are what merit the wait-and-see approach by opponents of marijuana's legalization.


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These new findings are surprising

However, according to U.S. News & World Report, legalizing marijuana has actually resulted in reduced access to pot for most adolescents. Based on the 2016 "Monitoring the Future" survey, just 34.6% of eighth-graders believed it would be easy to get pot, down 2.4% from 2015. A similar story was seen with 10th-graders, where 64% said they could easily get weed if they wanted. The eighth- and 10th-grade responses are the lowest ever recorded for this annual survey, which began in 1992. High school seniors were the exception, with a slight uptick to 81% in the 2016 survey, though the increase wasn't considered statistically significant.

Why is adolescent access to marijuana declining at a time when legal pot shops seem to be popping up in a number of states? Truthfully, researchers don't have any concrete explanations, though there's a handful of good hypotheses.

For example, the director of the National Institute on Drug Abuse, Dr. Nora Volkow, had two possible explanations. First, she opined that teens could be spending more time on their computers and engulfed in their technology than with their friends. This leaves fewer opportunities to be offered marijuana products by friends. Second, she implied that declines in alcohol and tobacco use among teens may correlate with lower pot use.

Ethan Nadelmann, the director of the Drug Policy Alliance, a national advocacy group in favor of marijuana's legalization, had a different hypothesis. Nadelmann suggests that the allure of cannabis is beginning to wear off as more states legalize the drug, essentially making pot "boring" for teens.

Whatever the reason, the data indicates that the legalization of marijuana in select states hasn't had an adverse impact on adolescent access or usage -- and that's good news for the pro-legalization movement.


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This, however, is not good news

What isn't good news for the pot industry is that no matter what path lies ahead, a major hurdle could constrain its growth prospects.

If you recall, in August the U.S. Drug Enforcement Agency denied two petitions calling for marijuana to be rescheduled from its current schedule 1 status. As a schedule 1 drug, cannabis is perceived to have no medical benefits and is illegal. The DEA leaned on a lack of safety and clinical data for cannabis in its analysis.

If the status quo continues and individual states are allowed to decide the fate of marijuana within their borders, then federal tax and banking laws could constrain industry growth prospects. Banks, for example, are mostly unable to work with cannabis-based businesses because the substance is still illegalat the federal level. This means some pot businesses are stuck dealing solely in cash, which is both a security risk and an expansion inhibitor. With marijuana remaining a schedule 1 substance, pot businesses aren't able to take normal tax deductions. Having to pay tax on their gross profits instead of net profits means marijuana businesses are paying a far higher tax rate than they should be.

However, if marijuana is rescheduled, it could be an even bigger nightmare for the industry. Though it would recognize the drug as having medical benefits and would open the door for the industry to take corporate tax deductions and gain access to basic banking services, it would also give the Food and Drug Administration strict oversight for the industry. The FDA would have the power to approve marketing and packaging of marijuana products and would likely oversee the manufacturing process for consistency from one crop to the next. More importantly, the FDA could require that clinical trials be run to confirm the benefits of marijuana in treating certain diseases. In other words, business expenses could shoot through the roof, essentially crushing small pot businesses.

What the future holds for marijuana remains uncertain, but whatever happens, it's bound to be a bumpy ride.

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