Federal Cannabis Legalization Expected as Soon as 2026
A deep dive into why you can expect cannabis legalization as soon as 2026, but with a 2028 target forecast -- using the lessons from the 'noble experiment' as the driving indicator
We all have that one friend that says, “be there in 5”, but shows up 12-15 minutes later. Cannabis federal legalization is a lot like that friend.
When California first legalized cannabis in 1996 it felt like the start of a fast track to federal legalization — “2020 for sure”, we thought. Yet with 2023 on the horizon the thought of full-scale legality is in the clouds, leaving anyone other than large multi-state operators (MSOs) struggling to keep the door open as policy fails them.
Relying primarily on the historic model of alcohol prohibition, and more specifically the impact of the Great Depression on consumer sentiment toward alcohol, federal legalization is projected to be here as soon as 2026 with an expected target of 2028. Let’s break it down.
History must be viewed just like data; the more data, the more insight, and the more insight, the higher probability of predicting what’s to come. To complement historic data, the following factors were used to construct a simple weighted distribution model for bull, bear, and target forecasts: all-time high industry consolidation through mergers and acquisitions and accompanying valuation gaps between large and small players, surging state legalizations, public policy shifting pro-business (including legalization bill reaching the Senate), an increasing federal deficit and general S-curve economics studying the lessons of expectations vs time.
Let’s start with the biggest driving indicator: using the history of alcohol prohibition as the guiding map.
No sale, manufacturing, or distribution of alcohol was declared under the 18th amendment in 1920. Individually, 33 states had already outlawed it. A criminal stigma had overtaken the American perception of spirits. Shays of the devil’s lettuce! Yet, didn’t last long.
Enter the stock market crash of 1929 and the start of the Great Depression. The pent-up anxiety of an uneasy economy and an illegal market that seemed to be thriving on the streets made even prohibition supporters reconsider if their ‘noble experiment’ had become a catastrophic failure.
Spoiler: they were right.
Here’s where we get into the weeds and notice eerie similarities between cannabis and alcohol prohibition. Both:
carried a criminal stigma (alcohol was fueled by religious perfectionism after WWI while cannabis roots can be traced back to WWII when government officials sold a narrative suggesting less-educated soldiers were the only members “abusing” cannabis)
saw consumer demand outbreaks as a direct result of macroeconomic events (alcohol spurred by the Great Depression and cannabis by COVID where it saw its largest y/y sales growth at 777%)
saw an illicit market thriving behind the scenes
created impactful tax revenues for government in the midst of piling national debt
While the majority of forecasting weight sits on the historic comparison to alcohol, we must look at other factors, including what’s been happening recently.
Industry consolidation by mergers and acquisitions are at breakthrough records — last year M&A grew 572% y/y to 2020, the largest yearly growth (and on a record pace this year too), unfortunately coinciding with poor industry conditions. Less than half of the country’s operators are turning a profit (42%) while in California (the largest market), small and medium players are left with an ultimatum, one driven by only a quarter of state operator profitability: sell the company (at least majority share) or close shop.
These and other financial constraints like denied checking accounts, credit cards, loan applications, or even credit lines have created massive valuation gaps between multi-state operators and smaller businesses. With no access to capital ammo, businesses cannot grow or make capital investments to lower fixed costs. But with strong balance sheets and healthy cash flows, MSOs have astutely gone on shopping sprees, setting themselves up with strategic instead of fiscal investments, further suggesting an increased MSO sentiment that federal legalization is sooner than most expect. For investors, record M&A should sound the alarm that these are buying times and likely either a bottom or local bottom in terms of enterprise valuations.
I can already hear Reddit retail investors saying, “buy and HODL” to cannabis stocks.
The Green Rush has finally reached a three-quarters reach with 37 states now allowing for at least medical use, 19 of those allowing for recreational. Surging state legalizations reaching the 75% mark is more significant than Americans expect. Not only are consumers breaking records but most policymakers tend to start reacting to public sentiment when metrics start to skew to a 2/3rds majority.
Before alcohol prohibition was formalized through the 18th amendment, it had already received support from 33 states (69%) and conversely gained support from 37 states (77%) when repealing prohibition in 1934.
Viridian Capital Advisors, a NY-based cannabis investment advisory firm analyzed the massive outburst of M&A consolidation vs underwhelming capital raises. When seeing the disparity, Frank Colombo, Director of Data Analytics at Viridian, concluded that if operators believed in incoming legislation and differing public policy, becoming more aggressive and raising capital (if possible) would be opportune.
That was March.
Since then, two massive headlines have gone widely unnoticed: the removal of the cultivation tax in California in July and a federal legalization bill reaching the Senate in July for the first time.
No one expects the federal legalization to pass this year, but it’s widely seen as a negotiation tactic to concede down to arguably the next best thing: the SAFE Act. The SAFE Act would allow FDIC banks (almost all are) nationwide to begin dealing with operators without the fear of repercussion. This means access to the aforementioned traditional financing services including outside capital through credit. Most (72%) of nationwide operators think this is the biggest hurdle. It also means no more having to store millions in cash in the backroom, only increasing the risk of theft and spending more on operating expenses to beef up security. And just as important, the bill’s new milestone of reaching the Senate shows momentum toward full-scale legalization.
California’s cultivation tax isn’t getting enough headlines either. Over-taxation is the norm for the Golden State and it doesn’t miss with weed. As one of the largest investment sectors in cannabis, cultivation (retail is massive too) growers felt the profitability pressure, especially since flower dominates retail sales. A $161/pound cultivation tax meant that unless a sale was made in bulk, the economics pointed to barely breaking even or just taking a plain loss, effectively de-incentivizing sales. For years industry leaders have lobbied for its removal on the basis that less taxation = more participation = more state revenue. A great read on California tax revenue forecast by the Reason Foundation suggests that by reducing both the cultivation and excise tax, California state revenue projects to make almost $800m by the end of 2024, hundreds of millions more than reducing or leaving tax policy as is.
As more states go legal, the bigger the pot grows for the federal government to dig into cannabis as an alternate source of revenue. With a high national deficit, policymakers will soon look to improve the country’s balance sheet — and with a market size that comfortably overshadows even the biggest emerging investment sectors such as electric vehicles ($137B by 2028 compared to $197B in cannabis) the writing on the wall becomes clear. The 1929 national deficit saw almost as much as half of its debt recovered by alcohol-related tax revenue in 1934, spurned by FDR’s New Deal. With cannabis tax revenue already surpassing alcohol tax revenue in states like Illinois, it only seems fitting.
We conclude with a more trivial sentiment than quantitive reasoning. To get a better sense of the s-curve of economics it can help to think of America’s national pastime.
For three hours fans watch the same three repeating scenarios: pitcher throws the ball, batter reacts (to swing or not to swing) and nine fielders start to pounce in anticipation. Three hours. Three repeating scenarios. Yet, home fans (generally) only cheer the loudest during two scenarios: the first pitch of the game and a home team homer (go Yankees, btw).
There are peaks and tropes, victories and consolidations, lead changes, pitching substitutions, position swaps, pinch runners, and more. No matter how great a team (Yankees) is, there are nine innings, 27 outs, and countless variables in between.
The path to victory should rarely be considered a linear one, but instead tend to look more like an S-curve model, displaying the lead losses and progressive policy setbacks (policy, banking, over-regulation) to get the dub (federal legalization).
Washington and Colorado first went recreational in 2012 with high hopes. But a giant rally of supporters and operators has gone hush to the prioritization of overcoming regulation and financial concerns to keep their business alive but help is on the way — I hope.