We predict that 2022 will be another favorable, yet unpredictable, year for the cannabis industry, which is expected to hit $30 billion in sales. Creative, nimble and well-capitalized businesses will thrive, while new entrants in established markets may struggle to gain footing amid banking and tax obstacles.
One thing is clear: momentum for federal legalization is building as consumers and the industry demand reform.
Consumption Lounges and Tourism
As the market matures, consumers will push for elevated experiences, such as consumption lounges. Up until now, consumers have been forced to imbibe in private because using cannabis in public is illegal in most states. Nevada, which recently passed legislation allowing adults to smoke or eat cannabis in consumption lounges, is now the eighth state to legalize pot lounges. The first Vegas lounges are expected to open mid-2022. While lounges have been extremely slow to open and remain rare, these communal spaces will de-stigmatize the plant, boost sales and potentially support social equity. For example, Denver will only allow social equity applicants to apply for new license types, including hospitality licenses that allow for cannabis consumption. Next up, cannabis hotels and restaurants, farm and dispensary tours, cannabis-spa packages, and cultivation classes.
New Product Offerings
Flower will remain king in most markets, but canna-beverages will explode as consumers emerge from the pandemic ready to socialize in larger groups. Innovative technologies are improving nanotechnology and emulsion techniques, while many Americans are seeking non-alcoholic alternatives. Canna-beverages may fill that void as a lower-calorie, non-hangover-inducing option.
Diverse Cannabinoids and Psychedelics
THC and CBD will remain on top, but some of the 100-plus lesser-known cannabinoids, such as delta-8 THC, THC-O, THCP, CBN and CBG, will hit shelves and consumers’ consciousness. These compounds will continue to be studied to determine their specific benefits and identify how they can be used to treat various conditions and achieve new highs. Cannabis has also paved the way for legalizing psilocybin mushrooms and other psychedelics, as many start to explore the therapeutic potential of these plants, and grassroots organizers push for decriminalization and legalization using cannabis’ path as a guide.
ESG Focus
Cannabis companies that can successfully implement environmental, social and governance (ESG) measures to not only establish comprehensive and forward-looking policies but also mitigate operational and reputational risks will set themselves apart in attracting consumer demand and capital investors. ESG will continue to prove its staying power in 2022 and companies that are ahead of the curve will be rewarded. As ESG standards continue to develop and become more formalized, however, companies should understand that establishing an ESG program will be an iterative process and require real commitment.
Increased Enforcement of the Legal and Illicit Market
As state licensing frameworks mature, state and local agencies will expand enforcement teams to confirm operators are accurately calculating taxes and remain compliant with permit conditions, track and trace obligations, and safety protocols. At the same time, states and local governments will face increased pressure to shut down illicit operators to protect legal operators’ significant investments and the environment. In California, we will also see a push to reduce state cultivation taxes and loosen regulations as operators struggle to comply with the onerous maze of state and local regulations, and prepare to compete nationally.
Cannabis Banking and Taxes
Cannabis companies continue to face significant roadblocks to their operations due to a lack of access to banking and an inability to deduct business expenses from federal taxes. The SAFE Banking Act, which has been introduced in Congress nearly every year since 2017, continues to receive robust debate among lawmakers. The bill would protect access to banking by cannabis companies. But every year, it remains stymied by Republicans in the Senate. Also under discussion are changes to IRS Code 280E, a section of the Internal Revenue Code that prohibits businesses engaged in trafficking controlled substances like cannabis from deducting various business expenses on their federal taxes. Here, too, no clear action is imminent, but momentum is building for change.
State Ballot Initiatives
It is safe to assume that the number of states allowing medical cannabis, recreational cannabis, or both will continue to grow through the 2022 midterms. Two initiatives are in the signature-gathering phase in Arkansas; Nebraska is set to re-vote whether to allow medical cannabis; Wyoming proponents are actively gathering signatures for a ballot proposal; and recreational cannabis proponents in Ohio are also seeking to put a legalization referendum on the ballot.
Federal Decriminalization/Legalization
Prior to the 2020 election, members of Congress had introduced a number of bills aimed at decriminalizing or otherwise loosening federal restrictions on cannabis. These included the STATES Act, which would have prohibited federal enforcement actions against cannabis conduct that is otherwise compliant with state law and the MORE Act, which would have decriminalized cannabis and expunged criminal records for nonviolent cannabis offenses. The legalization landscape grew more complicated when a number of senators this year introduced the Cannabis Administration and Opportunity Act, a comprehensive bill that would decriminalize cannabis, enable interstate commerce in cannabis, and make major changes to how cannabis is regulated by the federal government. None of these bills currently has a clear path to becoming law, but members of congress are pushing forward regardless. In a surprising move, a freshman Republican from South Carolina, U.S. Rep. Nancy Mace, just introduced a new bill to decriminalize cannabis, with deference to states’ individual preferences on how to treat the plant. This new energy from a Republican in a red state could provide the jolt of energy needed to move the debate forward.
Midterm Election Implications
As the November 2021 election cycle showed, even down-ballot elections can impact the prospects of cannabis. Despite passing legislation in Virginia, deadlines in the original bill mean peril for the effort to open commercial activity in Virginia as Republicans took control of the governorship and the Virginia House. The 2022 midterm cycle could upend the progress made by cannabis proponents at the state and federal levels. Indeed, while bills like the SAFE Banking Act have passed a Democrat-controlled House of Representatives, Republican voter turnout coupled with redrawn congressional maps could result in a steeper hill for cannabis to climb.
Amy Steinfeld and Joshua Weiss are shareholders at Brownstein. Amy is also co-chair of the firm’s Cannabis & Industrial Hemp Industry group.
