Business
Can Cannabis Help Cure Government and Bank Revenue Shortfalls?
Can Cannabis Help Cure Government and Bank Revenue Shortfalls?
By Andy Montgomery | Published July 1st, 2020
As COVID-19 again rises its ugly head amidst an opening of economies around the United States, it is becoming increasingly clear that a snap back of the economy is a naïve notion at best. Americans will be living with this unwanted new normal for some period of time to come. The aftermath remains uncertain, but the present is already having significant effects on our economy and way of life. Government stimulus, which comes at a long-term cost, has provided a boost of adrenaline, but will eventually wear off. We are in the midst of a financial recession and there are no clear precedents to draw on which provide a guide to its severity or longevity. This means that both governments and banks need to find alternative sources of revenue.
SAFETY DRAINS REVENUES
Different from “the Great Recession” which began in 2008, this economic crisis will be far more impactful to Main Street businesses and not contained to an asset bubble. Consumers just simply stopped all at once from popping into local businesses and, even with moderate openings, many retailers and restaurants have no chance to recover to pre-COVID conditions. Add to that, virtual learning behaviors that are quickly being integrated as preferences in our daily lives. This lack in demand will work its way through various other supply chains and continue to wreak havoc on our economy for some period of time.
The impact of decreased tax revenues from Main Street economies is already being felt in municipalities and states around the nation. It comes at a time in which they are already tasked with providing for the safety of citizens through extraordinary and costly measures. This is quickly depleting the reserves of governments; most of which have no good alternatives to raise revenue.
BANKS HAVE AND WILL BE IMPACTED
Similarly, banks have only begun to feel the full impact of the crisis. In the first quarter of 2020, bank revenues were down a whopping 70%. Banks will certainly see some revenue boost as a result of the massive PPP effort, but the stimulus will wear off for them also. Almost every commercial business in the country has been negatively impacted by COVID-19 and that will work its way into banks’ lending portfolios, earnings and liquidity. The building momentum in the third and fourth quarters of credit contractions and bank layoffs could be as significant as 2008.
CANNABIS TAX REVENUES REQUIRE SAFE BANKING
One source of revenue that is yet to be adequately optimized in the 33 states that have approved some form of legalized cannabis is maximizing the tax revenue from this growing industry. Most state and local governments are collecting a fraction of the tax revenue that they intended from cannabis. That is mostly because the illegal trade of cannabis is in full supply and provides harsh competitive pricing pressure on businesses that want to comply with the laws and regulations. Law enforcement will readily admit that they do not have the financial resources or public will to put a dent in the illegal trade. This keeps legal cannabis from operating at their optimum potential and from paying the tax revenues that are increasingly needed by state and local governments.
During a press conference in April 2020 New Mexico Governor Michelle Lujan Grisham (D) stated that she wished the legalization of recreational marijuana would have passed earlier this year as it would have offered additional revenue for a state with limited resources and a large outbreak of COVID-19. “If there was ever a time for wishful thinking, I wish we had passed recreational cannabis because that would be $100 million.”
Also in April, the U.S. Virgin Island Governor Albert Bryan Jr (D) began the process of revisiting cannabis legalization stating, “We have taken the time to gather further public input as well as address the concerns of the individual legislators,”…“As the economic disaster, the last few weeks has created has affected the [Government Employees Retirement System] greatly it is our hope that we can have a greater sense of exigency in implementing all the things that can help us regain solvency.”… “Certainly, cutting the annuity of retirees by 30 percent cannot be the path,” he said.
- Oklahoma’s medical marijuana sales increased 21 percent in April 2020. The State could possibly sell $700 million before the end of the year.
- In April, Colorado’s retailers sold almost $150 million in marijuana and related products.
- In May, Illinois retailers sold almost $45 million worth of marijuana and related products, exceeding projections.
- Florida Department of Health stated that the week of March 13th – March 19th, more medical marijuana was sold in one week since the states program began in 2017.
IT IS A LAW ENFORCEMENT ISSUE
One way around relying on law enforcement to clean up the cannabis businesses is to have the banks do it. That is why 34 Attorney Generals from states and territories across the country have signed a letter to Congress in support of the cannabis “Safe Banking Act.” But, as cannabis is still illegal federally, banks have no clear mandate or rules to follow from federal regulators to safely bank cannabis. However, according to FinCEN data, approximately 525 banks and 185 credit unions knowingly banked cannabis clients in March 2020. The Chairwoman of the FDIC, Jelena McWilliams, gave a clue as to how the federal regulator of banks would feel about their members banking cannabis as she has integrated the topic in all of her recent speeches and said that regulators would be okay with its members banking cannabis as long as they followed the FinCEN guidance and state regulations.
Denver, Colorado’s Audit Committee released a report stating, “The Treasury Division’s Audit Unit Is Not Effective or Efficient at Ensuring All Marijuana Taxes Are Reported and Paid.” The audit also lists specific findings and recommendations.
Recently, Colorado’s Attorney General Phil Weiser tweeted, “Crimes at #cannabis businesses are often driven by the fact that so many of them are all cash businesses. That’s why we led a coalition of State AGs to support @RepPerlmutter’s work on the #SAFEBanking Act, allowing such companies access to safe banking.”
COULD THIS BE A WIN-WIN?
The bottom line is that if banks capitalized on the nascent and growing cannabis industry it could add liquidity and profit at a time when they need it the most. To safely bank cannabis they would need to vet the businesses and ensure they are complying with all of the laws and regulations, But, by integrating more cannabis related businesses into the banking system and migrating them away from dealing in an all cash world, the money goes directly into the economy and adds very inexpensive deposits and a new source of fees for banks. It also makes those cannabis related businesses that are not legal and compliant,recognizable outliers that are easier to spot for law enforcement as they will continue to be forced to trade and live using all cash.
