The Next 3 States to Legalize Recreational Pot

We're now just over two weeks away from closing the door on 2018, and when we do, we'll likely look back on what was the biggest year ever for the marijuana industry.

In Canada, lawmakers passed the Cannabis Act in June, and officially ended nine decades of recreational weed prohibition on Oct. 17. As the first industrialized country to legalize recreational marijuana use, Canada has paved a path for other countries to follow, as well as given its legal weed companies an opportunity to generate billions of dollars in added sales.

Numerous legalizations occurred in the U.S., too, despite the fact that the federal government hasn't changed its tune on cannabis. During midterm elections, residents in Utah and Missouri voted to approve medical marijuana initiatives, bringing the number of states to have legalized pot in some capacity to 32. Vermont and Michigan also gave the green light to recreational marijuana during the year, increasing the number of adult-use states to 10.

The next states to legalize recreational weed will be...

It's pretty evident from polling that the American public favors legalization. Gallup's October 2018 survey found that an all-time high 66% of respondents approve of recreational weed. And we also know that the tax revenue generated from medical and/or recreational cannabis sales can prove helpful in allowing states to close budget deficits or expand existing budget surpluses.

The big question is: Which state(s) will legalize next?

While there's no way to know with any certainty, the following three states have what I would deem an above-average chance of legalizing adult-use pot within the next year.

New Jersey

Of the 40 states that haven't legalized recreational weed, the Garden State looks to be the likeliest to do so -- and rather quickly, might I add.

On Nov. 26, two panels in the state Legislature voted in favor of three new marijuana bills, one of which would legalize recreational marijuana. According to that bill, which could soon find its way to Democratic Gov. Phil Murphy's desk, recreational pot would become legal for adults age 21 and over, with a maximum of 1 ounce allowed to be purchased.

The only perceived holdup at the moment is what consumers should pay in taxes. The current proposal calls for a tax rate of 14%, which would be substantially lower than in California and Washington, which have combined tax rates for pot of 37% and 30%, respectively, not counting local tax rates. However, Murphy has called for a tax rate of 25%, which would match Nevada and give New Jersey a better opportunity to close a budget gap being widened by the state's pension program.

Assuming Murphy and state lawmakers can come to an agreement, Curaleaf Holdings (NASDAQOTH: CURLF) would be smiling ear to ear. Curaleaf, which currently has more than half its existing dispensaries in Florida, is building a two-acre greenhouse in New Jersey, and could quickly become a force to be reckoned with after snagging $400 million from going public. With New Jersey expected to generate $850 million in aggregate pot sales by 2022, vertically integrated dispensaries like Curaleaf will be champing at the bit to secure new business.

New York

This is another state with a really good shot at legalizing marijuana within the next year.

In June, Howard Zucker, commissioner of New York State's Department of Health, announced that the benefits of recreational marijuana outweigh the risks, based on his department's findings. New York is one of two dozen states that don't have the initiative and referendum process, meaning any legalization of recreational weed would have to occur at the legislative level.

Then, this past week, Gov. Andrew Cuomo, a Democrat, called on the state Legislature to draft a bill to legalize recreational weed in 2019. Although Cuomo hasn't always supported legalization, the lure of taxable revenue is often too great for states to ignore. With Democrats taking back the state's Senate in November, a path has been cleared for legalization. As a reminder, Republicans have historically had a more-negative view of cannabis than Democrats have.

If New York chooses to give the green light to recreational pot, it would thrill MedMen Enterprises (NASDAQOTH: MMNFF) shareholders. MedMen has only 14 dispensaries open at the moment, but three of those are in the Empire State. MedMen is also in the midst of an aggressive expansion that includes the $682 million acquisition of privately held PharmaCann, which has been awarded four dispensary licenses in New York, and will boast a 127,572-square-foot production facility in the state. That would boost MedMen's presence in what could be a notable cannabis market.


Though it's more of a long shot than, say, New Jersey or New York, Illinois could be the third state to legalize recreational weed within the next year.

Recently, the Democratic mayor of Chicago, Rahm Emanuel, proposed legalizing recreational marijuana. While most folks would like to believe that public support for weed has pushed Emanuel to call for change, it's really Chicago's need to address more than $27 billion in unfunded liabilities for the city's public employee pensions that's driving this possible policy change. Taxing recreational weed and funneling the collected revenue to the city's pension fund could help close some of that gap. According to USA Today, Chicago needs an additional $276 million in 2020 to pay for police and fire pension contributions, and $310 million by 2022 to cover the municipal and laborers fund.

Curaleaf would also be thrilled to see Illinois legalize. Shortly after the company went public via a reverse takeover (by buying a publicly traded company), Curaleaf's executive chairman Boris Jordan suggested that Illinois was a focus that's high on its list. Mind you, Curaleaf currently has 34 opened dispensaries, but is looking to more than double that to 69 by the end of 2020. It certainly has more than enough capital to do so.

Now, we simply watch and wait to see which states legalize next.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.