According to Greenwave Advisors, even if President Trump decides to challenge the recreational cannabis industry aggressively, forecasts for the market see it hitting $18 billion easily by 2021. If Trump decides to leave the market in peace, however, industry projections put its value at a whopping $30 billion instead, predicating upon each state having a medical, recreational, or full legal market.
In his new report, analyst Matt Karnes gives credibility to these projections by noting that legal marijuana sales in the United States totaled roughly $6.5 billion in 2016, a 35 percent increase from the $4.8 billion generated just the year before. “In 2017, we expect growth of 18 percent to $7.7 billion as new medical use markets come online,” Karnes said. He also thinks that California will constitute 40 percent of the total market in the United States, and that more and more states will continue to legalize.
Capital investments are flocking into the legal marijuana sector because numbers such as these promise highly lucrative profits. Despite all the legal and monetary risks involved in joining this market, the average size of a deal has been rapidly increasing from $500,000 in 2012 to around $2.2 million last year. Angel investors and venture capitalists are funding 38 percent of these investment dollars.
Greenwave also indicates that the financial problems that marijuana businesses face currently could ease up under the administration of Trump. All major and federal banks have been avoiding the industry simply because weed remains illegal federally and they do not wish to antagonize federal authorities. Additionally, compliance requirements for providing pot firms with services keeps profit margins low.
According to Karnes, he believes that President Trump has been signaling his intention to reduce the burden of the Sarbanes-Oxley Act and deregulate the banking sector. “This event could free up banking resources to focus on cannabis businesses,” Karnes explained. Greenwave speculated also that pot firms could gain limited tax relief from the dreaded 280E section code.
Section Code 280E specifies that those who operate businesses that involve touching the cannabis plant, such as cultivators, product processors, and dispensary owners, can deduct “cost of goods sold” from their taxes, but not any other frequently incurring costs of running a company, such as utility bills and rental expenses.
“Washington State is combining its medical and recreational markets with a ‘medical friendly’ designation, which requires an in-house certified medical marijuana consultant to issue a ‘recognition card,’” Karnes said. “We believe that allocation of these related costs to ‘costs of goods sold’ should likely be permissible and provide some tax relief under section 280E.”
If Washington allows tax relief for ‘costs of goods sold,’ then it is highly probable that other states would follow its lead. The government, of course, may instead prefer to maintain the strict requirements of section 280E, but as Greenwave reminds us, “federal income tax collections over the next five years could amount to $27 billion under Section 280E of the IRS tax code.”
For Karnes, implementing a more favorable tax rate would generate additional capital for the industry, which in turn could help offset the very high rate of taxes that the current system collects. Another important finding in the Greenwave report is what Karnes calls simply the “marijuana market metamorphosis.” States are now recognizing that it makes more sense to maintain separate markets for medical and recreational cannabis, as regulatory efforts quickly become redundant and many businesses stock products that could fall on either side of the market. As an example, some edible products may have higher levels of cannabidiol for medical patients, but higher levels of THC for recreational users.
The report said, “We see this effort presently in Washington, Oregon and Alaska, and expect that Colorado will soon follow.” If the State of California also decided to combine its regulatory oversight, it would become the very first state to do it without monitoring its medical marijuana market first. Such a move could be just the catalyst that other states need to initiate similar approaches.
Lastly, the Greenwave report suggests that as the legalization movement spreads nationwide and takes hold in more and more states, it will crumble the black market in its wake. The report states, “Based on wholesale pricing data from Cannabis Benchmarks, we estimate that currently, the illicit market in the United States is approximately $36 billion.” Some experts suggest it is significantly higher.
To get to this figure, Greenwave says of its calculations, “we determine based upon a multiplier of reported marijuana confiscations by the United States border patrol and quantities of plant eradication initiated by the Drug Enforcement Agency.” It seems that regardless of the federal government’s opposing views on legalizing marijuana, its reluctance will not dampen this lucrative market in any way.
