Most Americans favor federal cannabis legalization. Nearly all Americans support medical cannabis legalization. This is not a new development. It has been that way for years. And it is a rare non-partisan issue. Over the past few years while support has been its highest, well, ever, a series of federal election cycles have come and gone. You’d think that with a unicorn non-partisan issue with majority and super- or even ultra-majority support, the federal government would have figured something out by now. But nope.
Federal cannabis legislation isn’t going to happen
Back in 2018, when California opened up for recreational cannabis licensing, all I heard was how federal cannabis legalization was around the corner. In fact, a lot of businesses bet their business model on federal cannabis legalization actually happening. Remember how the MORE Act, or the PREPARE Act, or the States Reform Act, or the Cannabis Administration and Opportunity Act, or H.R. 420, or any other legalization bill was “about to happen”? Yeah, about that…
What a lot of cannabis advocated didn’t realize is that support for cannabis legalization at the 30,000 foot level is hard to translate into actual legislation that can garner bipartisan support. The federal government can’t just legalize cannabis – it has to create some kind of legal framework to do that. And that is where the shit hit the fan. In order to reach a compromise, Democrats needed to give up on some equity provisions, while Republicans needed to give up on some business provisions. And nobody seemed to be able to compromise.
So instead of federal cannabis legalization, what we got was a series of misguided attempts to do piecemeal legalization, most notably the SAFE Banking Act, which, even as I write this, is suffering the above fate due to inability of Congress to reach a basic compromise in spite of herculean lobbying efforts.
So here is my first prediction: even though federal cannabis legalization should be low hanging fruit, it won’t happen. At least not in Congress, and at least not before the 2024 general election.
Federal cannabis administrative changes probably will be a thing
That brings me to the administrative side of things. Last October, President Biden pardoned some retroactive cannabis simple possession offenses, and also announced the following:
I am asking the Secretary of Health and Human Services and the Attorney General to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law. Federal law currently classifies marijuana in Schedule I of the Controlled Substances Act, the classification meant for the most dangerous substances. This is the same schedule as for heroin and LSD, and even higher than the classification of fentanyl and methamphetamine – the drugs that are driving our overdose epidemic.
Since then, the federal government has apparently taken this missive seriously. For example, I spoke with MJBizDaily recently about how states are sharing medical cannabis data with the federal government as part of this process. And at least some folks are suggesting that rescheduling happens later this year.
With that, here is my second prediction: the federal government will reschedule cannabis, but not remove it from the Controlled Substances Act (CSA) altogether. My preference would be for complete descheduling and deferral to the states (see here and here), but that seems unlikely for a few reasons. First off, Biden’s announcement (if you read between the lines) essentially asks for rescheduling as opposed to rescheduling. Second, Biden (the guy we gave a “D” rating on cannabis) himself has called for moving cannabis to schedule II. Third, the federal government is looking for medical data from the states, which is relevant to determining the proper CSA schedule.
So all of that is to say that federal cannabis rescheduling probably will happen, just not through Congress.
Schedule II (bad) or schedule III (less bad)
My third prediction is that cannabis will end up on schedule II or III. Either way, not much will change from the state regulatory point of view. No state’s regulatory program will comply with federal laws if cannabis is on any CSA schedule. Just think about someone selling anabolic steroids with a state license but no DEA registration. Nope! Likewise, rescheduling won’t necessarily ease up restrictions on consumers. Illegally purchased prescription drugs are illegal, and so illegally purchased cannabis would be too.
The biggest change, however, would be to federal tax laws. This is because of section 280E of the Internal Revenue Code, which provides:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Businesses that “traffic” in controlled substances ON SCHEDULES I OR II cannot make standard tax deductions. This is one of the top reasons, if not THE top reason that the cannabis industry is up against the ropes now. If cannabis is rescheduled onto schedule II, the tax burden won’t change. If it goes onto III or (less likely) IV or V, the tax problem is mitigated, at least going forward.
If 280E goes away, you will see a sea change in the cannabis industry. Razor thin margins will be less razor thin. Investments, which have largely dried up, will come back with force. And so on. It will be a game changer. But only if cannabis gets down to schedules III or below.
Something will happen in before the general election
Not to be cynical (okay, I am totally cynical), but I predict that the rescheduling will happen around the time of the 2024 election. Why? Because it will give the current administration a bump. And with a number of swing states like Pennsylvania that have embraced cannabis, that’s exactly what the current administration needs to do to keep control of the government.
It’s really hard to predict how federal cannabis laws will shake out and I usually refrain from joining the “legalization is around the corner crowd.” The U.S. Congress is perhaps the most inept it’s ever been, and we’re dealing with a government that still treats cannabis the same way as heroin and more intensely than opioids. But with an election cycle and an administrative process that’s already in motion, I think it’s safe to say that something will happen in the next year. Whether that something ends up being good or bad though is anyone’s guess.
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