Cannabis legislation is being used as a ‘political pawn,’ Entourage Effect Capital partner says

Entourage Effect Capital Managing Partner Matt Hawkins joins Yahoo Finance Live to talk about the potential Congressional vote on marijuana legalization, the cannabis industry, and how cannabis companies are taxed.

Video transcript

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- Just passed 4:20 on a Friday. What better time to talk cannabis? And a big pop for those stocks across the board this week on some optimism of legalization legislation in the House of Representatives as a bill from Jared Nadler will apparently receive a vote next week. And for the week, these stocks-- Sundial up 55% since on Monday, Tilray up 49% since Monday, Aurora 24%, Canopy Growth up 18%. Let's talk about this optimism with Matt Hawkins, Entourage Effect Capital managing partner. Matt, good to see a man. So, this is interesting to have this type of optimism. Maybe it's just an industry that is starved for some good news. But given the likelihood of anything getting out of the Senate, is this much ado about nothing?

MATT HAWKINS: [LAUGHS]

It's exactly that unfortunately. You know, I think the reality is, is that Chuck Schumer is going to present his Cannabis Administration and Opportunity Act probably in April. The Marijuana Opportunity Expungement Reinvestment Act that's in the house, you know, has a chance of getting some traction there. What's going to be really interesting is just to watch the debate-- I believe it's on Tuesday-- just to see how many Republicans actually show support for it.

But, you know, the reality is, is that even though this is becoming a bipartisan issue and almost 2/3 of Americans live in a legalized state right now, there's still a lot of political posturing going on and it's about, you know, whether it was a Republican or Democrat that drafted the bill and submitted it. It's unfortunate because it's being used as a political pawn right now.

JARED BLIKRE: And Matt, there is still the Safe Banking Act bill in front of the house and that's being sponsored by Representative Perlmutter out in Colorado. We were talking with the cannabis industry trade group representative earlier today and she said that it's a non-starter just because of the optics. It's really only helping out the more affluent part of the cannabis crowd while you have thousands of lower income people stranded in jail right now for a crime that could potentially become not a crime. So just given that, is there a bridge? Is there a way to merge the two? Do we need a new bill? Do we have to vote on something a second time? I guess what I'm asking is, what's it going to take to move forward at this point?

MATT HAWKINS: Well, the reality is, is that as the Safe Banking Act has passed the House of Representatives six times, so the Senate's the holdup right now. But to your point about it not having enough of the social equity and social injustice components in it, it probably does need to be addressed in some form or fashion. But the Safe Banking Act, in and of itself, is good for the industry for a variety of reasons, mainly because it will reduce the cost of capital to the industry, it will open up the larger banks just to take deposits. Right now usually it's state chartered banks, municipal banks, credit unions. So it'll make doing business easier in the industry and I think everybody should want that. But again, it's being used as a political pawn and it's unfortunate.

- Yeah. I mean, the public opinion polling on this matter-- 68% of the American public favors legalization of cannabis. In this country, 68% of the American people don't agree when the sky is blue, so that is a dramatic number. So when do you think we'll see something get through the Senate, in particular Safe Banking? And as an aside, I just want to ask you about, I know 20 CEOs from the cannabis industry were on Capitol Hill last week. Did any optimism come out of that?

MATT HAWKINS: So I do think there's a chance to say Banking Act passes sometime in the next six to 18 months. I think a federal reform is still years away. I mean, there was a lot of optimism when the Democrats took over the Senate and Biden was elected. And so we had a similar-- well, actually, a prolonged pop in the stocks, like you've seen in the past couple of days here, on this announcement of the House bill. But again, to your point at the very beginning, it's been much ado about nothing because there needs to be something done to push this forward and to tax and regulate this the way the legalized states are doing and they're ultimately tamping down the illicit market in the process.

JARED BLIKRE: Well, and Matt, I want to keep talking about taxes here because I only recently learned that where weed and cannabis products are legalized in the US, those businesses are not able to deduct their own business expenses, so they're already paying a lot of taxes. I'm just wondering how that calculation affects these bills, perhaps even some kind of a projection that there might be less tax revenue coming into the government. I'm just wondering what your overview of this situation is.

MATT HAWKINS: It's complicated. Because if you think about it, the federal government is complicit in this. I mean, Section 280e, which is the section of the tax code that you're referring to, the federal government is collecting money on a federally illegal business. Not only that, but the Fed, there's money going through the Fed wires, you know, every hour. And so that's what's so ironic about this is you've got a federally illegal business that's almost-- some people estimate to be $20, $30 $40 billion domestically. But yes, it's getting taxed to there and gone and we need major reform in order for this to be the thriving business and to produce more jobs like it's doing currently.

- If there's optimism, it's probably not related to DC, it's more the tri-state area. New York, New Jersey, and my state of Connecticut all have voted to legalize recreational. When do you think those three come online and how dramatically will that impact the industry?

MATT HAWKINS: It'll impact it in a huge way. I mean, New York will be the second largest state in terms of revenue for the industry behind California. I think it's going to be '23, unfortunately, before those three states are fully operational. Connecticut may come in a little earlier, but New York certainly is going to be '23. So that's a bit disappointing, but nevertheless it's still very, very exciting that those three states have gone in this direction. And to your point about the polling earlier, it just shows you. I mean, the most populous state short of Texas, there is either a very, very robust medicinal program or it's recreationaly legal.

JARED BLIKRE: Well, I'm glad we were able to end on a somewhat positive note right there. Thanks for stopping by here. We have met Hawkins, Entourage Effect Capital managing partner.