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Banking and Cannabis: Yearning to Be Buds?

By Heather Morton  |  March 7, 2022

No question about it: People are happy to buy recreational and medical marijuana, dispensaries are happy to sell it and states are happy to rake in the tax revenue.

Since legalization eight years ago, Colorado marijuana sales have topped $11 billion, with nearly $2.2 billion in 2020 alone. The Arizona Department of Revenue estimates nearly $611 million in sales of both medical and recreational cannabis since the latter’s legalization in January. In Nevada, taxable sales hit nearly $912 million in 2021. Ohio’s medical marijuana program estimates $471.2 million in sales from April 2019 through July 2021.

Although they are a drop in the bucket compared with broad-based taxes, cannabis tax revenues are still significant, even exceeding cigarette and alcohol tax collections in many states. In 2019, marijuana tax revenues represented about 0.36% of state budgets, on average, in the seven states that had programs in place for the full year. In a few states, it’s a little higher than 1% of total revenue.

Despite the billions being generated, there’s one important industry that hesitates to get involved: banking.

"Having an entire industry operating with limited access to banking services is a serious public safety threat and makes commercial cannabis businesses a target for crime, putting the safety of employees and customers at risk." —California Assemblyman Reggie Jones-Sawyer
"Forcing the industry to transact business in cash is dangerous and it impedes commerce." —Alaska Rep. Sara Rasmussen

For many in financial services, the risk is just too great. Federal law still prohibits the possession, distribution and sale of cannabis, even though 37 states and four territories allow for its medical use, and 18 states, two territories and the District of Columbia have legalized adult recreational use. Any money that can be traced back to a state marijuana operation could be considered aiding and abetting a federal crime and money laundering. The risks extend to companies working with cannabis businesses, including law and accounting firms, landlords, vendors, suppliers and employees.

That means cannabis businesses must operate in cash—and the cost can be high. Statistics can be difficult to obtain, but in its 2019 testimony to the U.S. Senate Banking, Housing and Urban Affairs Committee, the American Bankers Association said that while Denver cannabis dispensaries make up less than 1% of all local businesses, they accounted for 10% of all reported commercial burglaries from 2012 to 2016. On average, more than 100 burglaries occur at cannabis businesses annually, according to the Denver Police Department, and burglaries and theft comprise nearly 80% of Denver’s cannabis industry-related crime.

“Having an entire industry operating with limited access to banking services is a serious public safety threat and makes commercial cannabis businesses a target for crime, putting the safety of employees and customers at risk,” says California Assemblyman Reggie Jones-Sawyer (D), who introduced a bill in his state to make it legal for financial institutions to work with marijuana businesses.

Federal Legislation

In Congress, U.S. Rep. Ed Perlmutter (D-Colo.) introduced the Secure and Fair Enforcement (SAFE) Banking Act of 2021 to prohibit federal banking regulators from penalizing financial institutions that serve legitimate cannabis-related business.

Perlmutter’s legislation, which he has sponsored in every Congress since 2013, passed the House in 2019, 2020 and 2021, and it has wide support from banking and insurance groups. Similar so-called safe harbor measures have been introduced in the U.S. Senate by Jeff Merkley (D-Ore.). Although both the versions of the legislation have bipartisan co-sponsors, the bills are tied to the larger debate over legalizing cannabis and whether a more comprehensive reform bill should take priority over the narrower banking protection measures.

“This legislation will allow credit unions to help these state-legalized businesses that are currently forced to deal exclusively in cash access the mainstream financial system, enhancing the safety of these businesses and the communities they serve,” says Jim Nussle, president and CEO of the Credit Union National Association.

States Press Forward

With little movement in Congress, some state legislatures have acted on their own. Colorado took a first step in 2014 by urging congressional action and trying a short-lived experiment: setting up cannabis credit co-ops. CaliforniaIllinois, Ohio, OregonVirginia and Washington enacted bills specifying that financial institutions serving legal cannabis businesses are not committing a crime.

MichiganNevadaOhio and Utah enacted bills creating closed-loop payment processing systems in which the states act as payment processors. Tax payments by dispensaries and purchase payments from consumers are made to the state, which tracks and administers the remittances.

In addition to creating a closed-loop payment pilot project, Nevada tasked its Cannabis Advisory Commission with studying the use of emerging technologies, including blockchain, to reduce or eliminate the handling of cash.

But states can only do so much; they lack the authority to grant access to the federal payment system that banks need to operate. And they have limited ability to help their own cannabis operations, which, due to strict cash-only requirements, have difficulty renting or purchasing property and must pay their taxes, utility expenses, rent and employees in cash.

The limitations have created a negative trickle-down impact on industry employees. Without access to safe banking, employees are being denied mortgages and loans, which hampers their financial options and threatens the economic integrity of communities, says Alaska Rep. Sara Rasmussen (R).

“In FY 2021, the state of Alaska collected just under $30 million in taxes from the marijuana industry—in cash,” she says. “Laborers and supply vendors are hesitant to work with those in the cannabis industry because doing so may jeopardize their financial standing. This is unacceptable. Forcing the industry to transact business in cash is dangerous and it impedes commerce.”

But with 36 states and four territories allowing for some use of cannabis products, there is increasing optimism for change at the federal level in the form of the SAFE Banking Act.

“After years of bringing up this issue, I’m thrilled to see overwhelming support for this bipartisan, commonsense legislation in the U.S. House once again,” Perlmutter said after his bill passed the House in 2021. “Congress needs to act in order to catch up with the will of the majority of voters across this country and to ensure we are reducing the public safety risk for our constituents and communities.”

Heather Morton is a senior fellow in NCSL’s Fiscal Affairs Program.

Update: Since this story was first published in the Winter 2022 print edition of State Legislatures magazine, it has been updated to reflect that 37 states now allow for the medical use of cannabis.

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