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Surprise! Attorney General Nominee William Barr Supports Marijuana Prohibition

Sean Williams, The Motley Fool

The legal marijuana industry has come an incredibly long way in a short amount of time. At the beginning of the decade, not a single U.S. state had legalized recreational marijuana, and the same could be said for any country around the world. Now, Canada and Uruguay allow recreational weed to be sold, and two-thirds of the U.S. has given the green light to medical marijuana. Having once been a taboo industry, cannabis is now a legitimate business model .

Within the U.S., support for pot is especially strong. Gallup's annual poll, released this past October, found that a record 2 out of 3 Americans favored nationwide legalization. That's double the favorability found as recently as the mid-2000s. As for medical cannabis, a survey from the independent Quinnipiac University in April 2018 found that 93% of respondents supported allowing a physician to prescribe medical weed, with only 5% opposed to the idea.

A judge's gavel next to a book on federal and state marijuana laws.

Image source: Getty Images.

Cannabis has been a buzzkill at the federal level

And yet, in spite of this growing support, marijuana remains classified as a Schedule I drug in the United States. This means it's entirely illegal, highly prone to abuse, and isn't recognized as having any medical benefits. Although state-level legalizations are ongoing, the drug still remains entirely illicit at the federal level.

As you can imagine, this can make life difficult for U.S.-based marijuana companies. For instance, they can be subject to Section 280E of the U.S. tax code, which disallows the deduction of normal business expenses, save for cost of goods sold, in any situation where a federally illicit substance is being sold. This can lead to very high effective corporate income tax rates, thereby limiting hiring and business expansion.

Pot businesses in the U.S. also have very limited access to non-dilutive forms of financing. Even though the federal government has maintained a hands-off approach, banks are leery about lending to the cannabis industry for fear of criminal and/or financial penalties, or simply seeing the companies that take their loans be unable to pay them back.

The lack of non-diluting financing options has been especially painful for investors in this space . Upscale cannabis dispensary MedMen Enterprises (NASDAQOTH: MMNFF) , having few avenues for traditional financing, has turned to two bought-deal offerings since September. A bought-deal offering involves the sale of common stock to an investor or group of investors to raise capital.

Though MedMen has had little trouble raising money this way, bought-deal offerings are ballooning the company's outstanding share count, which can weigh on shareholders and push down profit per share... when the company becomes profitable. Since Aug. 1, 2018, MedMen's market cap has jumped 216%, but the result of share-based dilution has pushed its stock lower by 8% over the same timeframe.

A drug-free zone street sign in a quiet neighborhood.

Image source: Getty Images.

Trump's AG nominee is no fan of marijuana

There's been hope that growing support for legalization, as well as the resignation of former Attorney General (AG) Jeff Sessions, who was arguably the biggest weed opponent in Washington, would fuel reform in 2019. Unfortunately, those calls for reform could once again fall on deaf ears if President Trump's attorney general nominee, William Barr, is confirmed for the position.

During recent Senate confirmation hearings, Barr was quoted as describing the existing system surrounding marijuana laws as "untenable," and suggested that he personally favors marijuana prohibition.

However, Barr also understands how far states have come in the legalization process and noted that he would not go after cannabis businesses in states where pot is legalized. That's not exactly resounding encouragement from the man who could soon be leading the Justice Department.

To be clear, there a few protections in place for pot companies operating in legalized states. For instance, the Rohrabacher-Farr Amendment (also known as the Rohrabacher-Blumenauer Amendment) is a rider that's been attached to federal spending bills for years that disallows the Justice Department from using federal funds to prosecute medical weed companies.

The Cole memo, prior to its rescinding by former Attorney General Jeff Sessions on Jan. 4, 2018, also provided a loose guideline for legalized states to follow in order to keep the federal government off their backs, so to speak.

While it doesn't look as if the U.S. weed industry is in any immediate danger if Barr is confirmed, it certainly doesn't help the prospect of a near-term legalization.

A cannabis leaf lying atop a hundred dollar bill and partially covering Ben Franklin's face, save for his eyes.

Image source: Getty Images.

Interestingly, the Justice Department isn't the weed industry's biggest hurdle

But what cannabis enthusiasts might find even more interesting is that the Justice Department is really the least of their worries . Money and the mindset of American voters are much bigger issues.

Even though marijuana is illegal at the federal level, Capitol Hill has no qualms about collecting income tax on corporate cannabis profits. As noted, Section 280E pretty much ensures that profitable pot businesses are going to be paying a high effective tax rate, thereby sweetening the federal government's coffers. If marijuana were suddenly legalized, businesses in the pot industry would no longer be subject to 280E, thereby allowing them to take normal corporate deductions. That probably sounds great for the businesses involved, but it'd cost the federal government an estimated $5 billion in income over the next decade. While that's not a lot of money relative to annual federal spending, it would still represent lost revenue at a time when the federal budget deficit hit its highest level in six years.

The other concern is that legal marijuana isn't a polarizing enough issue with American voters to coerce action on Capitol Hill. Despite record levels of support for legalization, only around 1 in 8 people surveyed by Quinnipiac University wouldn't vote for a candidate who didn't share their views on cannabis. Comparatively, 82% of respondents would still vote for a candidate, even if their views on weed were different.

Make no mistake about it, these issues are far more troublesome for the pot industry than anything William Barr could say during his confirmation hearing.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .