Marijuana News: The SAFE Banking Act Passes The House In A Landslide -- Here's What Happens Next

For the past three years, marijuana has taken Wall Street by storm. Even with cannabis stocks in a six-month funk, the biggest names in the industry are many multiples higher than they were three years ago on the expectation that legal weed sales will grow somewhere between five and 18 times the $10.9 billion in worldwide sales recorded in 2018 by the end of the next decade.

Being a Schedule I drug comes with its fair share of problems

The one major uncertainty in these growth projections continues to be the United States. Despite being the most lucrative cannabis market in the world, the U.S. federal government has remained firm on its classification of marijuana as a Schedule I substance. This classification means marijuana is on par with heroin and LSD as being entirely illegal, prone to abuse, and isn't recognized as having any medical benefits.

In spite of being labeled a Schedule I drug, it hasn't stopped 33 states from legalizing medical marijuana since 1996, 11 states of which have also legalized adult-use consumption. These 33 states are currently running circles around Canada, the only fully legal industrialized country in the world, in terms of sales, thanks in part of the federal government taking a hands-off approach to regulation.

Nevertheless, there are clearly defined consequences to Congress holding pat on cannabis as a Schedule I substance.

As an example, profitable businesses that operate in the U.S. marijuana space are subjected to Section 280E of the tax code, which was implemented in the early 1980s to keep drug smugglers from writing off "business expenses" on their taxes. In layman's terms, marijuana companies aren't able to take any deductions on their federal income taxes, save for cost of goods sold. If profitable, this can mean paying an effective tax rate of 70% to 90%, which leaves little income left over for reinvestment and hiring.

U.S. pot companies also have minimal access to basic banking services, including loans, lines of credit, and even checking accounts. Since financial institutions report to the Federal Deposit Insurance Corporation (FDIC), and the FDIC is a federally created agency, banks and credit unions fear possible financial and/or criminal repercussions for aiding cannabis companies. This has made marijuana an industry dominated by cash, which is both a security concern and an expansionary constraint.

However, certain members of Congress believe they have a solution to this latter problem.

The SAFE Banking Act passes in a landslide

The Secure and Fair Enforcement (SAFE) Banking Act was introduced earlier this year in the House of Representative as a means of permanently protecting financial institutions in legalized states that want to offer basic banking services to marijuana businesses.

Since 2014, protections have existed for cannabis businesses in legalized states via riders that have needed to be passed with each successive fiscal year. However, the SAFE Banking Act represents the first piece of stand-alone cannabis legislation to be voted on in Congress. Were it to become law, Congress would no longer need to pass annual riders, since the Act itself would protect banks and credit unions from being targeted by the federal government for providing services to the marijuana industry.

On Wednesday, Sept. 25, the House officially voted on the SAFE Banking Act under a procedure known as "suspension of the rules." This procedure is typically reserved for noncontroversial legislation in instances where lawmakers want to quickly pass a bill. Of course, a simple majority doesn't work with suspension of the rules. Instead, a two-thirds majority (290, or more, out of 435 votes) is needed for passage.

When the gavel struck, members of the House voted overwhelmingly to pass the SAFE Banking Act: 321 in favor, to 103 opposed. A majority vote was certainly expected with the bill having 206 cosponsors heading into its historic vote. However, 321 yay votes are above and beyond expectations and demonstrate that cannabis banking reform has become a bipartisan issue.

The big question is: Now what?

What's next for the SAFE Banking Act?

Now that the SAFE Banking Act has passed the lower house of Congress, it'll move on to the Republican-controlled Senate. The problem is, the GOP has historically had a more negative view on marijuana than members of the Democratic or Independent party, making it less likely that banking reform legislation will have the votes needed for passage in the Senate.

Additionally, it's been suggested that while Senate Republicans are open to discussion and a vote on banking reform measures, those measures may not mirror the exact bill just passed by the House. In order to persuade Senate Republicans to take up the issue and vote in favor of reform, certain concessions may need to be made, such as including protections for hemp and cannabidiol (CBD) companies, as well as possible stipulations that federal agencies won't be able to target certain industries without valid cause, such as the firearms industry.

Even Senate Democrats may push back on the SAFE Banking Act. Similar to the minority opposition in the House, some Senate Democrats believe that it's not prudent to consider reforming cannabis banking laws before broader marijuana reforms are tackled at the federal level.

And, of course, there's always Senate Majority Leader Mitch McConnell. While it's always possible that McConnell will allow some version of the SAFE Banking Act to make it to the Senate floor for vote as a means of courting 2020 election votes, it's more likely that McConnell will aim to block the bill for vote, which is what he's done with other forms of cannabis legislation.

According to Senate Banking Committee Chairman Mike Crapo (R-Idaho), the chamber will vote on cannabis financial services legislation before the end of the year. Unfortunately, this doesn't narrow things down too much in regard to when or if we can expect the Senate to vote on a complete bill. While industry enthusiasts and investors remain cautiously optimistic, signs continue to point to no resolution on banking reform anytime soon.

This article originally appeared in the Motley Fool. The Motley Fool has a disclosure policy.