Will the GOP Tax Plan Lead to a Surge in Marijuana Legalizations?

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There's a reason the legal marijuana industry is known as the "green rush." According to a report from Marijuana Business Daily, entitled "Marijuana Business Factbook 2017," the U.S. legal cannabis market is expected to grow by 45% in 2018 and by an aggregate of 300% between 2016 and 2021. By 2021, we could be talking about $17 billion in annual sales being conducted in legal states.

Today, there are 29 states (along with Washington, D.C.) that have legalized cannabis for medical use, and eight states (and Washington, D.C.) have voted to allow the sale of pot to adults ages 21 and up. This expansion simply would not have been possible without a consistent shift in the way the public views marijuana. Since 1995, favorability toward the idea of legalizing marijuana has improved from 25% to 64% as of October 2017, according to national pollster Gallup. The higher favorability goes, the more likely it is that new states will legalize. After all, if elected officials don't follow the will of their constituents, they risk being voted out of office.

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Could the GOP tax plan be a positive for the marijuana industry?

But it's not this "will of the people" that has some industry analysts excited. Instead, some political strategists believe that the Republican tax plan currently working its way through Congress could spearhead recreational and medical marijuana legalization efforts in certain states.

The GOP tax plan is being touted as the first expansive overhaul of U.S. tax code in three decades. It's aiming to significantly lower the corporate tax rate from 35% to perhaps as low as 20%, while at the same time lowering what most individual taxpayers will owe. Regarding this latter component, standard deductions are expected to nearly double, while a number of other deductions and credits get eliminated, thus simplifying the tax code for John and Jane Q. Taxpayer.

There is, however, one pretty substantial sticking point in the GOP tax plan that has some states brimming with anger: the elimination of the state and local tax (SALT) deduction, with the exception of up to $10,000 in state and local property taxes. Taxpayers in states that have high sales and property tax rates have relied on the SALT deduction to help lower their effective tax rate for years. However, if the current GOP tax plan pushes through, residents in states with high sales tax rates, such as New York or California, or exceptionally high property tax rates (looking at you, New Jersey), could see their liability rise by as much as 7%-8%.

According to political strategist Bradley Tuck at CNBC, higher tax rates could push wealthier individuals who'd be hurt the most by the new SALT deduction rules to move to a lower-tax state. For others who decide to stay put, it could just mean less in the way of discretional spending, which hurts local businesses and economies. Doing so would take a bite out of the revenue that high-tax states would typically collect and leave their annual budgets short on cash. The answer, Tusk implies, would be to legalize recreational marijuana.

It's worth pointing out that Phil Murphy (D-N.J.), New Jersey's governor-elect, has already stated that if recreational marijuana legislation were bought to his desk, he would sign it. The cap on property tax deductions just might be the tipping point for Murphy's state to legalize. And if New Jersey legalized, and New Yorkers flooded across the border to buy legal cannabis, it seems only plausible to assume that the Big Apple would follow suit.

Three things to keep in mind

While much of what Tusk suggests makes sense on paper, industry enthusiasts and marijuana stock investors should keep three things in mind.

First of all, a number of states with the highest sales tax rates have already moved forward with legalizing recreational marijuana. California voters gave the green light to Prop 64 back in November 2016, while votes in Washington state were among the first two states to approve adult-use pot back in November 2012. Yes, New York, New Jersey, and Illinois could represent intriguing expansion opportunities for the pot industry, but a number of progressive states have already beaten Tusk's prognostication to the punch.

Second, keep in mind that the lack of an initiative and referendum (I&R) process in 24 states could make it considerably tougher for those states to legalize recreational (or even medical) weed. In states that lack the I&R process, it's up to their legislatures to introduce bills and sign them into law. In other words, the public doesn't really have a say on the matter. In Vermont, a state notorious for being unfriendly to its retirees from a tax perspective, Gov. Phil Scott (R-Vt.) vetoed a recreational marijuana legalization bill earlier this year that was approved by both the state's House and Senate. Even as a progressive state, it could be impossible to legalize adult-use pot.

The final factor to consider is the impact Jeff Sessions could have on the industry. It's no secret that Sessions would wage war on the cannabis industry if he could. This is the man who sent letters to a few of his congressional colleagues in May requesting that they repeal the Rohrabacher-Farr Amendment. This is what currently protects marijuana businesses from federal prosecution in legal states. It was, in a way, a request to trample states' rights. Should the Rohrabacher-Farr Amendment (also known as the Rohrabacher-Blumenauer Amendment) not get included in the upcoming federal budget, Sessions would be free to use federal dollars to go after marijuana companies.

Long story short, while the GOP tax plan does technically open the door for expansion, its true impact is likely to be minimal at best given the hurdles the industry is yet to tackle.

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