It's no secret that all eyes are on Canada. On June 19, after months of debate in the Senate and some quick back-and-forth between the Senate and House of Commons, Canada's parliament passed the Cannabis Act, paving the way for it to become the first industrialized country in the world to legalize recreational pot. With Canada legalizing and bringing in what could be billions of extra dollars in revenue annually, the attention has now turned to which country could be next.
Around the globe, roughly 30 countries have legalized marijuana in some capacity, with much of Europe giving medical cannabis a green light. In fact, with European grow industries being nascent or completely nonexistent, most will be relying on Canadian exports to meet their demand needs. But just two countries -- Uruguay and Canada -- are waving the green flag on recreational cannabis.
Could the United States be that third country? While it seems exceptionally unlikely at the moment, the idea can't be completely discounted due to the upcoming midterm elections in November.
Midterm elections may be an inflection point for the U.S. weed industry
As things stand now, there are 236 Republicans in the House of Representatives, along with 193 Democrats and six vacant seats. In the Senate, there are 51 Republicans (including the late Sen. John McCain of Arizona), 47 Democrats, and two Independents. Inclusive of President Trump in the Oval Office, Republicans have control of the legislative branch of the federal government, assuming they vote along party lines.
But that control isn't guaranteed to continue much past November. If Republicans were to lose just two seats in the Senate, they'd no longer have the ability to get to 50 votes by party lines, which allows Vice President Mike Pence to cast his vote to break any ties. And in the House, losing in the neighborhood of 19 or 20 seats, depending on how the vacancies are filled, could cost Republicans their majority.
Why is this important? Traditionally, Republicans have a far more negative view of cannabis than do Democrats or Independents. In April, a survey by the independent Quinnipiac University found that while 63% of respondents supported recreational weed legalization, compared to just 33% who didn't, just 41% of self-identified Republicans supported the idea, with 55% opposed. Support among Democrats and Independents was 75% and 67%, respectively. What this suggests is that conservative-minded members of the GOP are unlikely to support cannabis reform or even to give a reform bill the time of day if one is introduced in the House or Senate.
However, if Democrats were to win a majority in one or both houses of Congress, the possibility of cannabis reform would be much higher. Though not every Democrat is necessarily in support of legalizing marijuana (just as not every Republican is opposed to the idea), Democrats' generally stronger favorability toward cannabis could result in reforms being introduced. The reason this is so significant is that President Trump said in June that he'd likely support ending the federal prohibition of marijuana, which remains a Schedule I (i.e., wholly illegal) substance. If a bipartisan cannabis reform bill reaches his desk, at least based on his June commentary, he's likely to sign it.
These three catalysts add fuel to the fire
In addition to closely watching midterm elections, keep an eye on a handful of other catalysts that could fuel the push toward legalization.
As noted in the Quinnipiac survey, most Americans favor legalizing marijuana. But this is far from the only survey in which favorability remained strong. In no less than a half-dozen major surveys over the trailing year, support for legalization has varied from a low of 59% to a high of 68%. Presumably, if the American public wants to see cannabis legalized, increasing pressure could be placed on representatives from supportive states to act.
There's also the fact that 30 U.S. states have passed broad-based medical cannabis laws, with nine of these states giving the green light to recreational cannabis use, too. That's three-fifths of the country demonstrating the ability to safely regulate and oversee a medical marijuana industry. This should, presumably, reduce federal legislative concerns about a broad-based legalization.
Finally, don't overlook the fact that the U.S. Food and Drug Administration (FDA) approved GW Pharmaceuticals' (NASDAQ: GWPH) Epidiolex as a treatment for two rare forms of childhood-onset epilepsy on June 25. GW Pharmaceuticals' lead drug is cannabidiol (CBD) based -- cannabidiol being the nonpsychoactive cannabinoid best known for its perceived medical benefits -- meaning it's the first cannabis-derived drug ever to get the thumbs-up from the FDA. The significance of this is that it directly contradicts the definition of a Schedule I drug, according to the Controlled Substances Act, of having no medical benefits. GW Pharmaceuticals' Epidiolex clearly having benefits could coerce cannabis reform at the federal level.
The battle rages on
Of course, thinking federal reform is a slam dunk would be a mistake.
To begin with, neither the American public nor political pundits and pollsters have any idea what Congress will look like following the midterm elections. It's possible Republicans will hold onto or build their existing majority in Congress. It's also a possibility that Congress will be split, with the Senate being led by Democrats and the House by Republicans, or vice versa. Either way, introducing a cannabis reform bill and having it gain traction on Capitol Hill will be easier said than done.
Building on this point, there are no guarantees that President Trump will sign a bipartisan cannabis bill put on his desk. Despite demonstrating support for a bipartisan bill earlier this year, Trump has wavered on marijuana before and may not have any incentive to move forward with legalization with his own election upcoming in a little more than two years.
A second key point to remember is that while most Americans favor legalization, marijuana itself isn't yet an important enough issue that politicians have to worry about losing their elected seats over it. In the April Quinnipiac poll, respondents were asked, "If you agreed with a political candidate on other issues, but not on the issue of legalizing marijuana, do you think you could still vote for that candidate or not?" A whopping 82% of respondents said they could, with just 13% saying no.
Finally, there are also big dollar figures standing in the way of legalization. Even though marijuana getting the green light at the federal level could lead to a big uptick in jobs, it would also mean no longer subjecting cannabis companies to Section 280E of the U.S. tax code. Section 280E disallows businesses that sell Schedule I or II substances from taking normal corporate income tax deductions. For pot companies that are profitable, it could mean paying an effective tax rate of 70% to 90%. Even with a lot of extra revenue following legalization, the federal government would likely bring in fewer tax dollars, since pot companies would no longer be subject to 280E.
In sum, there's bound to be a battle that rages on Capitol Hill in the years that lie ahead. There is, however, no guarantee it will lead to any real reform.
10 stocks we like better than GW PharmaceuticalsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and GW Pharmaceuticals wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018