Legalizing Pot: It’s About the Money [OTCMKTS:MDBX, OTCMKTS:MJNA, OTCMKTS:GRNH]

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February 3, 2014 12:36am ETF BASIC NEWS

investingSean Brodrick: America hasn’t legalized an outlawed industry since the end of Prohibition, but that may be changing. Nearly 60% of Americans believe that marijuana should be legalized for recreational use, and two states have

done just that.

The strongest economic argument in favor is that pot sales will boost tax revenue.

And while that’s likely true, a close look finds it may not be an endless fountain of new tax money. Let’s look at what’s really going on.

Pot is now legal for recreational sales in Colorado. And Washington will make it so in June. Maine, California and Vermont might follow suit. Twenty states plus the District of Columbia already allow pot for medical purposes.

Colorado logged $5 million worth of recreational marijuana sales in its first week, netting the government around $1.45 million. With a 25% excise tax on pot, the state hopes to collect as much as $23 million a year.

This is exactly why Prohibition was repealed in 1933. Before Prohibition, about 14% of government tax revenues were derived from alcohol commerce. Repeal did provide the government with much-needed tax revenue and created jobs during the Depression.

It worked then. Will it work now?

The Jobs Are There

There are jobs in the marijuana business. Many of them are entrepreneurial. There are at least five marijuana trade schools in Colorado. (I can only imagine what the class reunions will be like.)

On the other hand, legal growers and dealers are faced with huge startup costs running into the hundreds of thousands of dollars. The state charges an application fee of $5,000 and license fees as high as $14,000. That just makes you legal.

Also, recreational pot in Colorado is priced at twice the cost of medical marijuana. Any student of history will tell you: The more cost-prohibitive you make something legally, the more tempting it is to do it illegally.

Growers face their own red tape. Colorado rolled out its $1.2 million Marijuana Inventory Tracking Solution. Here’s how that works…

  • Every plant a commercial grower sticks in the dirt gets a radio-frequency tag.
  • The tag moves with the plant through its lifecycle. Once the marijuana is harvested, everything is weighed. Then it’s weighed again after drying out and at other points during processing.
  • Packages shipped to the stores can’t weigh more than a pound and they get their own RFID tags.
  • At the shop, store owners are required to weigh their inventory every day.

What a hassle!

No wonder only 136 of the 517 medical-marijuana dispensaries operating in Colorado applied for a recreational sales license when it was first offered last fall.

And forget getting a bank loan. The banks are afraid of the feds, though the Obama administration will soon allow banks to accept deposits from state-legalized marijuana businesses.

It’s About the Money

The state of Washington’s taxes will be even more onerous than Colorado’s – perhaps as high as 44%. (Street dealers cheered!) The state estimates it may collect as much as $2 billion in new taxes over five years.

So, just like alcohol prohibition, marijuana is being legalized to fill government coffers.

What would happen if marijuana were legalized nationally? Some 25.8 million Americans acknowledged using marijuana in the past year, according to the National Survey on Drug Use and Health. And 15.2 million said they smoked pot in the past month. They spend at least $10 per gram to buy pot illegally, according to a separate study in California.

If it were sold at that price legally, pot could raise $40 billion to $100 billion in new tax revenue.

But that’s only if all illegal sales were diverted to legal sales at high tax rates.

The Marijuana Policy Project also estimates that the government would save $7.7 billion on anti-marijuana enforcement, out of $51 billon spent annually fighting drugs.

And marijuana accounts for 10% of those incarcerated for nonviolent drug crimes – about 20,000 people nationwide. It costs about $47,000 to incarcerate one inmate for a year in California.

Those against legalized weed say the fact that marijuana is illegal cuts down use quite a bit. Once it is legal, a lot more people will use it, and there are social costs to that.

Can You Play It?

Are there ways for you to profit? While there are a handful of penny stocks – Medbox Inc(OTCMKTS:MDBX), Medical Marijuana Inc(OTCMKTS:MJNA) and GreenGro Technologies, Inc.(OTCMKTS:GRNH), to name three – deep in the weeds of this business, I can’t recommend them. The legal landscape is still very cloudy.

The biggest area of tension is between federal and state law. Not only is growing, selling and possessing marijuana still illegal federally, section 280E of the Internal Revenue Code requires that those violating the Controlled Substances Act – whether they’re street dealers or big, regulated marijuana businesses – pay taxes on the proceeds of all transactions.

However, marijuana growers and dealers cannot deduct normal business expenses. The only break marijuana businesses get under 280E is that they can deduct their cost of obtaining their illegal goods. So, this little-known tax-law wrinkle creates enormous incentives for marijuana companies to sink as much revenue as possible back into their businesses.

In other words, the IRS is giving marijuana dealers and growers every incentive to grow their businesses faster.

As usual, Uncle Sam’s rules make perfect sense.

Good investing,

by Sean Brodrick, Resource Strategist, The Oxford Club

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

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