- Three Democratic senators shared an ambitious plan to legalize cannabis.
- Elements like decriminalization would be good for current companies, said Cantor analyst Pablo Zuanic.
- But he says other parts — like a high federal tax rate — could burden consumers.
- See more stories on Insider’s business page.
On Wednesday, three Senate Democrats led by Majority Leader Chuck Schumer unveiled an ambitious plan to legalize cannabis on the federal level.
Though the bill is unlikely to pass the Senate, it marks the first time leading Senate Democrats have taken up cannabis legalization as a top priority. It’s the latest sign of changing attitudes toward marijuana in the US.
The plan is preliminary, but as it stands now, the Cannabis Administration and Opportunity Act, or CAOA, would end federal cannabis prohibition, expunge some criminal records, and permit companies to transport products across state lines.
In a Thursday note, Cantor Fitzgerald analyst Pablo Zuanic broke down key elements of the proposed legislation and laid out which parts would be good and bad for current multi-state operators (MSOs), or cannabis companies that grow and sell cannabis in several states across the US.
Here are the main points of the discussion draft and how they would affect MSOs:
Cannabis descheduling would be a big win for the industry
The bill would remove cannabis from the Controlled Substances Act (CSA), meaning cannabis companies would no longer be subject to tax code section 280E, a Reagan-era rule that raises their costs.
Zuanic said he expects that US cannabis companies would be able to list on US exchanges and access mainstream banks and funding. Canadian cannabis companies would also be able to buy businesses in the US that directly handle marijuana.
This would give a huge boost to cannabis companies, said Zuanic. Four companies — Curaleaf, Green Thumb, Trulieve, and Cresco Labs — stand to benefit the most.
The industry would have new regulators
The Drug Enforcement Agency would no longer have jurisdiction over cannabis. Instead, the responsibility would fall on the Food and Drug Administration (FDA), Alcohol and Tobacco Tax and Trade Bureau (TTB), and Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).
“Eventually this may lead to federal level norms on THC content and other standards,” said Zuanic, “but for now this is open ended. It could also take some time.”
A hefty federal tax would burden consumers
Cannabis products would have an additional federal tax on top of state taxes. The excise tax would start at 10% and increase until it reaches 25% by the fifth year.
Starting from the fifth year, tax rates would be determined by weight for flower products or potency for extracts.
“In our view, this would be a new burden for consumers, who already pay as much as 25-35% in sales taxes at the state/local level,” Zuanic said.
Adults would be allowed to buy and possess cannabis
The bill leaves local legalization up to states, but says that under federal law, adults over the age of 21 will be allowed to possess less than 10 pounds of cannabis. Zuanic says he expects this number to be negotiated down.
Companies could transport their products across state lines
Currently, cannabis companies aren’t able to transport their products over state lines.
Under the bill, companies would be allowed to grow cannabis in one state before transporting it to another to sell directly to consumers, something businesses in virtually every other market are able to do today.
States that haven’t legalized cannabis couldn’t prevent shipments from going through their state, but Zuanic says it’s unclear whether the bill would allow states to block imports into their regulated markets.
A big role for states would persist
Each state will still be able to decide for itself whether it wants to have a regulated cannabis market. This would mean little change from the system that’s currently in place.
CBD would be categorized as a dietary supplement, offering a boost to CBD companies
CBD, a non-psychoactive cannabinoid, would be categorized as a “dietary supplement” under the bill.
Though there are plenty of CBD products on the market today, this change would provide legitimacy for the industry. Companies today aren’t able to legally claim their products offer therapeutic or health benefits.
“We see this as rather positive for CBD stocks,” Zuanic said.
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