Don't Undermine the Medical Marijuana Industry

FROM BLOOMBERG BUSINESS WEEK….

VIEWPOINT June 21, 2011, 11:01AM EST

Don't Undermine the Medical Marijuana Industry

It's hard for legal dispensaries to get bank loans, and they can't deduct expenses from their taxes. Let's back legislation to fix that

By Scott Shane

Consider two small business owners: One sells a product that medical researchers have shown is a major cause of health problems, from cancer to heart disease. The other provides a medical treatment that doctors prescribe for glaucoma, pain, and the side effects of chemotherapy. Which owner can borrow from a bank and deduct expenses on income tax returns? The answer is the first, who sells cigarettes; the second, who sells medical marijuana, cannot. (To be clear, dispensary owners aren't prohibited from applying for bank credit. The trouble is anti-money laundering statutes intended to stop illegal drug dealers make banks reluctant to do business with legal dealers.)

In late May, two Democratic congressmen, Jared Polis of Colorado and Pete Stark of California, introduced bills to remedy the federal government's bias against the owners of medical marijuana dispensaries. Representative Polis's bill would permit medical marijuana sellers to borrow money from banks, while Congressman Stark's bill would allow them to deduct business expenses from their taxes. Passage of these bills makes sense for four reasons.

The first is fairness. No small business owners should be denied access to financing or be subject to unfair tax rules simply because they run a business that some in government don't like. The government should create a level playing field for all business owners. As Polis explained when introducing his bill, "It is simply wrong for the federal government to intrude and threaten banks that are involved in legal transactions." Using a law designed to root out illegal drug dealers, terrorists, fraudsters, and money launderers as a back-door way to make life difficult for the operators of medical marijuana dispensaries is simply unfair. If Congress doesn't like state medical marijuana laws, it needs to challenge the legality of these laws directly rather than stack the rules against them.

FAVORING TOBACCO OVER MARIJUANA

But fairness isn't the only reason I support these bills. I also find it perverse that the government favors the tobacco business over the medical marijuana industry when the former is responsible for several costly medical problems and the latter provides a medically prescribed treatment. Not only does the government's approach makes it difficult for people who need physician-prescribed marijuana to get the treatments they need, imposing pain and hardship, but the approach is also backwards. The government supports the sale of cigarettes, which cause cancer, but discourages the sale of medical marijuana, which is used to manage the side effects of the chemotherapy that these cancer patients must endure. As for healthy individuals who abuse the system to get high, isn't that why we spend large sums of money to stop the illegal drug trade?

By blocking the growth of the medical marijuana industry, federal policy makers are missing a golden opportunity to encourage entrepreneurship. Government officials often speak of finding new, high-growth industries, which are rare. Consultancy See Change Strategy in Olney, Md., forecasts that medical marijuana, currently a $2 billion industry, will reach nearly $9 billion in five years. That's about the same size as the dry cleaning and laundry service industry.

Finally, by opposing the medical marijuana industry, the federal government is missing the chance to cut government expenditures and raise taxes in one of the few areas where such actions would face little opposition by business owners. Unlike virtually every other industry, where higher taxes are vehemently opposed, the medical marijuana industry welcomes higher taxes. In Oakland, for example, the industry drove the effort to impose a 1.8 percent tax on gross sales from medical marijuana sellers.

The potential economic gains from the legalization of marijuana are far from trivial. A 2005 study by Jeffrey Miron, then a visiting economics professor at Harvard, found that government spending could be cut by $7.7 billion and tax revenue increased by $6.2 billion if marijuana sales were legal and taxed at the same rate as alcohol and tobacco. A $14 billion improvement in the government budget isn't something to ignore, especially in the current environment of paralysis over how to reduce high deficits.

Allowing owners of medical marijuana dispensaries to borrow money and deduct their business expenses from their taxes seems like a way to make policy fairer, encourage a high-growth industry, and reduce government expenditures and raise tax revenues without much opposition. Those seem to me like the kinds of objectives our elected officials should be striving for when introducing bills into Congress.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.