The 11th State to Legalize Recreational Pot Will Be… – The Motley Fool

In terms of momentum, the marijuana industry has been practically unstoppable in recent years. Once considered a taboo topic that lawmakers regularly swept under the rug, cannabis has now become a mainstream topic in the United States, as evidenced by the fact that 2 out of 3 Americans support broad-based legalization, according to Gallup.

Cannabis favorability has also been the driving force of legalizations at the state level. In 24 years, we’ve gone from having zero approved medical or recreational weed states to 33 states with medical pot laws on their books. Of these 33 states, 10 allow for adults to consume cannabis, with nine having OK’d the retail sale of pot (sorry, Vermonters).

With pot revenue picking up at the state level, and polling clearly favoring legalization, it looks to be only a matter of time before new states take the plunge from the medical or recreational side of the equation. But, to be clear, recreational sales are expected to bring in the lion’s share of legal marijuana revenue in the United States.

Image source: Getty Images.

The 11th state to legalize recreational weed will be…

So, which state looks to have an inside track on becoming the 11th to legalize adult-use marijuana? Had you asked a few months ago, it looked to be a neck-and-neck battle between New Jersey and New York. Unfortunately, efforts to legalize marijuana in both states fell apart, and neither looks to be in a position to pass legislation anytime soon. Instead, the Land of Lincoln appears to be in the pole position to become the 11th recreationally legalized state.

As reported by Time and the Chicago Tribune last weekend, Illinois Governor J.B. Pritzker, a Democrat, announced that he had reached an agreement with key lawmakers in the state’s legislature to legalize recreational marijuana by Jan. 1, 2020. The bill would allow residents of Illinois to possess up to 30 grams of cannabis (a little more than one ounce), with out-of-staters allowed to possess up to 15 grams. Illinois residents would also be allowed to grow up to five plants. And, as with all other legal states, the age limit for purchases would be set at 21 and older. 

In addition to simply legalizing adult-use weed, the bill announced by Pritzker would expunge certain cannabis convictions (e.g., misdemeanors and Class 4 felonies), and include a $20 million low-interest loan program. This loan program would aid applicants in opening a licensed cannabis business who have lived in communities with high crime rates, or in communities with a high rate of incarceration or arrest for marijuana offenses.

Image source: Getty Images.

Then, there are the highly lucrative taxes on recreational pot. Cultivators and processors would pay 7% of their gross sales to dispensaries, with consumers paying at least a 10% tax rate on recreational cannabis products. Products with less than 35% tetrahydrocannabinol (THC) content — the cannabinoid that gets a user high — will bear a 10% tax rate, with products over 35% THC content (e.g., concentrates) featuring a 25% tax rate. Cannabis-infused beverages will sport a 20% tax rate. And, just for good measure, municipalities and counties can add on their own separate tax rates, which peak at 3% for municipalities, and up to 3.5% for unincorporated counties. At least 10% of the revenue generated from legalizing recreational pot would help Illinois cover unpaid bills. 

According to the governor’s office, even though legalization would take hold on Jan. 1, 2020, recreational licenses for dispensaries wouldn’t be issued until May or June 2020.

These pot stocks are champing at the bit for Illinois to legalize recreational marijuana

As we saw from the Garden State and Empire State, even so-called sure things can fall apart. While the pathway to legalization looks clear now, the bill will undoubtedly face opposition. But should Illinois become the 11th state to OK adult-use marijuana, there would be quite a few happy campers in the cannabis industry.

For starters, MedMen Enterprises (NASDAQOTH:MMNFF) would be doing the happy dance. Although the upscale, vertically integrated dispensary operator has but one open location in Oak Park, it would make MedMen’s $682 million all-stock deal to buy privately held PharmaCann look all the sweeter. You see, PharmaCann was initially awarded six medical marijuana licenses in Illinois, which was tops in the state at the time of the award. It has four open dispensaries that serve about 80% of the Chicagoland market, and it has two relatively local production facilities. With the infrastructure already in place, MedMen would simply need to apply for a recreational license, or amend its existing medical pot licenses, to get a piece of what could be a multibillion-dollar market. 

Image source: Getty Images.

Recreational weed legalization in the Land of Lincoln would also be a feather in the cap for Canopy Growth (NYSE:CGC), which announced the contingent acquisition of Acreage Holdings (NASDAQOTH:ACRGF) for $3.4 billion last month. If the U.S. federal government legalizes marijuana, within a 90-month time frame Canopy will have the right to acquire Acreage, which currently has cultivation, processing, or retail operations in 20 states — best among vertically integrated dispensary operators. Among those 20 states is Illinois, where Acreage has a cultivation farm and two dispensaries. In other words, it would further entrench Canopy Growth in one of America’s key markets.

The largest vertically integrated dispensary by license count (assuming all pending acquisitions close), Harvest Health & Recreation (NASDAQOTH:HRVSF), also stands to benefit. In March, Harvest Health announced that it’d be acquiring privately held Verano Holdings for $850 million in an all-stock deal. Verano currently has two Zen Leaf dispensaries located in Illinois (one in Chicago and the other in St. Charles). While Harvest Health will have 130 retail store licenses in 17 states (again, assuming all acquisitions close), you can count on Illinois becoming a reasonably important part of its long-term strategy.

Now, we simply watch and wait to see if Illinois lawmakers can deliver the green as the governor has promised.