Cannabis Legalization: Impact on the Smoking Industry

Cannabis legalization and in turn, cannabis popularity, has grown rapidly in the United States in recent years. Thanks to the 2018 farm bill’s accidental removal of hemp as a Scheduled One controlled substance, cannabis has catapulted to a multibillion-dollar industry. As more and more states legalize cannabis, a shift in the smoking industry has begun.

The United States generates 43% of all revenue for the top 5 tobacco companies in the world, making this country the second most important market for tobacco after China. And with a major shift from tobacco use to cannabis use, cannabis is not only impacting the smoking industry at a rapid rate -- it’s about to change the game completely.

Historical Context

The cultivation of cannabis plants in the United States dates as far back as the 17th century when the government encouraged the production of hemp to make items such as rope and clothing. It wasn’t until Mexican immigrants popularized its recreational use in the early 20th century that the country's view on cannabis shifted. Deeply rooted in racism and fear, the criminalization of cannabis began in 1914 with the Harrison Act, and action against cannabis only became more restrictive as the years went on.

We began to see a shift once again in the 1970s when President Richard Nixon appointed a commission that recommended decriminalizing cannabis in 1972. Although Nixon ended up deciding against the recommendation, states began to decriminalize the drug themselves. Between 1973 and 1979, 11 states decriminalized cannabis possession. By 1996 California was the first state to legalize cannabis for medical purposes. In 2012, both Colorado and Washington legalized recreational use.

Recreational cannabis use is now legal in 24 states, the District of Columbia, and Guam. The only states that do not have at least some sort of medical use program are Idaho, Nebraska, and Kansas. The cannabis industry continues to grow year after year with revenue hitting 29.6 billion in 2023. Some states are even seeing more revenue from cannabis products than both alcohol and tobacco.

Half of Americans have now at least tried cannabis, and a staggering 70% believe it should become fully legalized. With 17% of Americans now regularly smoking marijuana and tobacco use down to 18.7%, it won't be long before cannabis dethrones tobacco.

The Smoking Industry Before Legalization

Tobacco has an even longer history in the U.S. than cannabis, solidifying its stronghold on the smoking industry during the First and Second World Wars when tobacco companies sent millions of packs of cigarettes to troops on the front lines, creating hundreds of thousands of addicted and loyal consumers. In the 1920s these companies started marketing to women, feminizing their products to make them more appealing. This strategy worked and by 1935 female smokers in the United States tripled.

With the rise in cigarette smokers came an increase in studies about the potential harm they cause. In 1952 a Reader’s Digest article titled, “Cancer by the Carton”, flipped the industry on its head. This article was the first of its kind, creating a snowball effect and opening up a discourse on how bad smoking might be. As more articles came out, the smoking world began to take notice and for the first time in over two decades, sales declined.

The tobacco industry took no time to respond to these allegations, and by 1954 the biggest tobacco companies in the United States founded the Tobacco Industry Research Council. The council quickly countered the growing health concerns of the public with heavy campaigning around the new, “healthier”, filtered cigarette, and sales were back on the incline. The formation of the Surgeon’s General Advisory Committee in the 1960s and their 387-page report concluding a direct link between cigarette smoking and lung cancer. This began the constant fight between the tobacco and health industries that continues today.

The Rise of Legal Cannabis

Cannabis is cannabis; but the regulations, purchasing avenues, potency, and forms can differ between medical and recreational use, and vary on a state-by-state basis. To purchase medical cannabis, you first need to obtain a medical cannabis card. Some states have a specified list of medical conditions that allow you to obtain your card, while other states allow your healthcare provider to determine your eligibility. Most states require both the user and medical professional to register with their state's medical cannabis program.

Recreational cannabis can be more easily obtained, only needing an I.D. to purchase from a dispensary. While any I.D. from any state, even one without a recreational cannabis program will get you into a dispensary for recreational use, in many states a medical card is only good for the state it is for. Both medical and recreational cannabis use has only continued to increase in the United States as more and more states continue to legalize it. The cannabis industry is now projected to reach 298.5 billion dollars by 2032 which would equate to a growth rate of 26.5% over the next decade.

Impact on the Smoking Industry

There has been a shift in Americans' preference from tobacco as exposure to cannabis grows, and the effects can be seen in this 2023 study. Researchers concluded that states with legal cannabis use have seen “small, occasionally significant, longer-run declines in adult tobacco use.” While the study indicated the declines were almost insignificant at 0.5 to 0.7%, they also concluded as more states pass legislation these percentages could creep up to 1.4 to 2.7%. With tobacco use already at its lowest in the U.S. and continuing to drop, a 2.7% decline would be significant for the industry.

Across the board, we can see the negative market share and revenue effects of the decline of tobacco use as access to cannabis becomes easier. In the last twenty years, tobacco farming in the U.S. has declined by 46.1%. Cigarette sales have decreased by 32.6% in the last decade and the tobacco industry as a whole has seen a growth rate decrease of 3% with a 1.8% revenue decline in 2024 alone.

As the cannabis industry has continued to grow, its ability to innovate has too. Vapes, edibles, topicals, pre-rolls, CBD, and concentrates are all innovative cannabis-derived products now sitting on dispensary shelves.

The tobacco industry has always had an interest in cannabis. With cannabis legalization rising and tobacco use falling, many companies have begun investing in and partnering with licensed retailers in the cannabis industry.

Tobacco company investments in cannabis:

• 2016: Philip Morris International invests $20 million in a medical cannabis inhaler.
• 2017: Altria invests $1.8 billion in a Canadian cannabis company.
• 2019: Imperial Brands begins partnership with Auxly Cannabis Group.
• 2021: British American Tobacco purchases a 20% stake in a Canadian cannabis producer.

Investments and partnerships aren’t the only way these two industries are merging. There has been a steady transition of big names in tobacco transitioning to high-caliber positions in the cannabis world.

Regulatory and Legal Challenges

Federal law still considers cannabis a Scheduled One controlled substance, creating a complex system to navigate for cannabis businesses. Banks are leery to work with cannabis-related businesses as they are committing federally illegal activities. Additionally, federal tax codes prevent cannabis businesses from deducting ordinary business expenses resulting in higher tax burdens. Because licensing is on a state-to-state basis, trying to run a business in multiple states is met with varying regulatory compliances, applications, and fees.

Because cannabis regulation varies by state with no federal guidance, the industry is at an increased risk of quality, safety, and standard issues. Changes in regulation requirements due to the ever-evolving legal status of cannabis create constant disruptions to the industry, causing manufacturers to have to adapt quickly while maintaining standards. Additionally, a lack of cannabis-specific metrics means a lack of consistent techniques to ensure quality across the board. This convolutes the industry and increases the difficulty in standardization.

Social and Economic Impacts

In 2023 states with legal cannabis use collected $4.18 billion in tax revenue. In 2024, cannabis will add an estimated 115.2 billion dollars to the economy, most of which happens at local levels. Cannabis does not just boost the economy with revenue, it also supports job creation. At 5.4% year-over-year growth, cannabis now supports almost 450,000 jobs in the U.S.

The war on drugs’ disproportionate enforcement of laws imprisoned marginalized communities at a significantly higher rate than their white counterparts. Now with a rise in popularity, cannabis reform is doing what it can to create provisions addressing the damages this has caused.

Social equity programs in many states assist people of color and women starting a new cannabis business and some states reserve their first licensing applications for these groups. Companies such as Cannabis Do Good provide anti-racism training to workplaces and businesses. They also founded the Cannabis Impact Fund which encourages cannabis businesses to donate 1% of their profits to social justice and equality initiatives.

Future Outlook

As more and more states legalize cannabis the question of if and when things will change at a federal level continues to be a hot topic. Three major reform prospects will greatly impact the likelihood of federal cannabis in the near future. If the DEA agrees to move cannabis from a Schedule One to a Schedule Three drug, the Safter Bank Act passes, and the 2024 reauthorization of the farm bill does not by definition separate cannabis from hemp we will be closer than ever to seeing federally legalized cannabis.

Whether cannabis becomes legalized on a federal level or not, the future of cannabis on a state level is as exciting and vibrant as ever. Cannabis lounges are popping up in more states, and cannabis tourism is at an all time high. Innovation has now begun to create products that center around wellness and specific needs. Products for sleep, concentration, and even energy have hit the market in recent years.

The U.S. is not the only country that has begun to change its perception of cannabis. Medicinal cannabis is legal in 23 European countries and Germany recently became the third European country to legalize cannabis for personal use. As the entire world begins to move towards cannabis legalization, this will only further push the United States in the same direction

Conclusion

We will continue to see a shift in favor of cannabis as more and more regulation passes and the taboo that surrounds marijuana use diminishes. Shortly we could see big changes from the largest tobacco companies as they once again pivot to remain relevant by moving into the cannabis space. The question is though, will that transition be too late and too tainted with all the negativity that surrounds the tobacco industry?

Several important items will move through the federal government in the back half of 2024, potentially paving the way for or blocking the future of cannabis in this country. It is important to stay up to date on these measures and use your voice to show support for continued cannabis reform and all the good that will come from it.

Stay informed on all things cannabis by keeping an eye on the SMOKEA blog, and stay educated with our knowledge base.

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