The marijuana bill that would legalize recreational use at the federal level passed a House vote on Friday and if passed in the Senate, could have the power to clear some roadblocks for issuers who’ve hesitated to build marijuana-related facilities.
The Marijuana Opportunity Reinvestment and Expungement bill passed the House by a vote of 220-204, with three Republicans voting in favor and two Democrats voting against. The bill would “federally decriminalize cannabis, expunge the records of people convicted of federal cannabis offenses and require resentencing of some federal prisoners,” the Congressional Budget Office said. CBO estimates that the bill would generate $8.1 billion over the 2022-2031 period.
The House passed a similar bill in 2020, which the Senate declined to take up. And while the efforts appear to be picking up steam, there remain differences hindering a united push. Senate Democrats have said they are focused on different marijuana legalization legislation introduced in draft form last year.
“Legalization of cannabis activities at the federal level should reduce the hesitation by issuers to engage in bond issuance discussions that might relate to, for example, first time farmer bonds or traditional governmental bonds,” said Matthias Edrich, tax partner at Kutak Rock in Denver.
But questions remain whether this will be a full green light for issuers to begin issuing tax-exempt debt for marijuana-related facilities such as grants to begin farming marijuana and whether decriminalization will relax banking regulations.
“But I think we would need to clarify whether decriminalization has the same impact as full legalization and how decriminalization affects banking transactions,” Edrich said. “Without full legalization of banking involvement with cannabis activities, it would be hard to imagine that successful financings can take place, because any bond transaction typically relies on interstate banking involvement.”
Federally insured and regulated banks have refused to handle transactions from cannabis businesses due to its status as a Schedule I drug and
This has forced states to fend for themselves, despite some clarifying guidance from the U.S. Department of the Treasury’s FinCEN on the Bank Secrecy Act for financial institutions providing services to hemp-related businesses.
But it still puts state treasurers in a difficult position, prompting the National Association of State Treasurers to send a letter to Congress in 2019, encouraging some form of formal legislation to help legalize the substance, and framing the matter as a states rights issue. NAST declined to comment for this article.
But this time around states are advocating for the bill because it would mean more control and generate more tax revenue, said Susan Parnas Frederick, senior federal affairs counsel at the National Conference of State Legislatures.
“We want states to have control over what they do with cannabis because we’re now at a point where more states have legalized it than have not,” Frederick said. “The trend is dictating where we want to be policy-wise, and we do have a policy urging Congress to take it off the Schedule 1 list. We’re past that at this point.”
Frederick noted that the
“Through taxation, we would benefit from it as well,” Frederick said.
The substance is legal for medical use in 37 states, and some are already taking note of how this affects a state or municipality's ability to borrow.
“The passage of medical marijuana laws increases state bonds’ offering spread by 7 bps, trading spreads by 11 bps and underwriter gross spreads by 4 bps,” according to the Aug. 2020 Brookings paper titled Marijuana Liberalization and Public Finance: A Capital Market Perspective on a Public Health Policy.
“In addition, counties residing in states that pass medical marijuana laws also experience high bond spreads of 6 bps,” the report said. “These findings indicate that municipal bond investors impose higher borrowing costs on local governments with medical marijuana laws.”
The results also indicate that this increase in borrowing costs is stronger for general obligation bonds, longer-term bonds and riskier bonds, the report said.
The conversation around marijuana legalization often centers around the significant increases in revenue that providing such facilities inevitably creates.. But for many states, those increases aren’t as significant as many think.
“Our research at the state level is that revenue from recreational marijuana is unpredictable, or at least it can be unpredictable,” said Adam Levin, officer with the state fiscal health initiative at The Pew Charitable Trusts. “If states are putting it towards recurring spending, it's a little bit risky because you don't know what amount or how much revenue you're going to collect the next year,” he added. “And it's unpredictable for a variety of reasons.”
But he ultimately doesn’t think that states should begin to rely on these revenue streams. In 2021, the State of Washington collected $560 million in taxes and fees related to marijuana, when their total state budget for the year was $55 billion.
Levin cites the lack of long-term data around recreational marijuana as a concern forecasting revenue, because unlike alcohol and tobacco of which there are decades of data to draw from, there’s hardly any data out there for marijuana, even for the early legalizing states like Colorado and Washington.
That concern should be present at the federal level as well, Levin said, and if the income generated from marijuana sales is treated as recurring revenue, it should be coupled with other recurring revenue sources.
“There are other ways that states could use [the revenue] effectively,” Levin said. “And that's maybe something like using it on a one time purchase, or expense,” he said. “That will probably carry over to the federal level.”
Caitlin Devitt contributed to this report.
