Will Biden’s move to reclassify Marijuana save California’s struggling Cannabis industry?
Federal Rescheduling of Cannabis Offers Hope to Struggling California Businesses.
A demonstrator waves a flag with marijuana leaves depicted on it during a protest calling for the legalization of marijuana, outside of the White House on April 2, 2016.
The federal government’s expected move to reclassify cannabis as a less dangerous drug could be a lifeline to struggling legal weed businesses in California — and possibly lead to lower prices for consumers.
The Drug Enforcement Agency is expected to reclassify cannabis under the Schedule III category of the Controlled Substances Act, akin to codeine and anabolic steroids, the Associated Press first reported. Until now, it has been in the Schedule I category, equated with drugs like heroin that have no known therapeutic value.
“This move will acknowledge what California has known for almost 30 years: Cannabis has medical value,” said Nicole Elliott, director of California’s Department of Cannabis Contro. “It will enable new scientific research into the value and potential risks of the plant. It will also help level the financial playing field for businesses that have long been burdened by inequitable federal tax laws.”
But — and there’s always a “but” when it comes to regulations involving cannabis — don’t expect the changes to happen overnight in California, where $4.4 billion worth of legal cannabis was sold last year.
Changes will become visible next year at the earliest, as it will take months, at least, for the federal government to complete the reclassification process. Cannabis, like other Schedule III drugs, are still federally controlled substances and subject to criminal penalties for illegally trafficking them.
Much of the potential good news in rescheduling for California herb businesses lies in the fact that they will no longer be subject to Section 280E of the federal tax code, which has long prohibited such businesses from writing off standard business expenses like payroll and insurance costs. If you’re trafficking a Schedule I substance, you can’t claim federal tax deductions. Lee estimated that “this will save individual marijuana businesses thousands, if not millions, in excessive taxes.”
Removing those costs could help legal cannabis businesses compete better in California, where weed-related taxes can be as high as 40%, depending on how much a particular municipality decides to tax a business, said Hirsh Jain, founder of Ananda Strategy, a California-based consulting firm that advises cannabis retailers and brands. Compare that to a state like Michigan, where the tax rate is 16% or Missouri, where it is 10%.
“Because California cannabis businesses have to deal with this really high state tax rate and then deal with the federal tax burden, that's what makes it really, really difficult” to compete, Jain said. “When that federal tax penalty goes away, at least these California cannabis businesses have a fighting chance. When they have to deal both with the state tax burden and with the federal tax burden, it’s almost impossible to run a sustainable legal cannabis business.”
One-third of the cannabis cultivation businesses haven’t renewed their licenses over the past few years, and 15% of all weed businesses in California are behind on their state tax payments, said Jain, who also serves on the board of the California chapter of the National Organization for the Reform of Marijuana Laws.
“They may not have failed yet, but that’s a good sign that they’re on the precipice of failure,” Jain said.
California’s high tax burden trickles down to consumers. It is so difficult — and expensive — to legally sell cannabis that 70% of the weed consumed in California comes from the illegal market, which doesn’t have to worry about including taxes in their sale price.
“There are huge consequences of having a rampant illicit market. Closing the competitive gap between legal and illegal operators will help the state with its very unique problem,” Jain said.
But many challenges remain.
Many banks are still reluctant to be involved with cannabis businesses, forcing many to continue to transport their proceeds in cash, an often dangerous proposition. On Wednesday, Senate Democrats, led by Senate Majority Chuck Schumer of New York, introduced legislation that called for the end of the federal prohibition against cannabis. But supporters were far short from securing the 60-vote threshold needed for a vote.
Schumer and other Democrats re-upped their support for the Secure and Fair Enforcement Regulation Banking Act, which passed out of the Senate Banking Committee last fall with the support of three Republicans. The measure would enable banks to lend to weed businesses in states where the product is legal.
But Congress is unlikely to do much in an election year. Congressional Republicans won’t want to hand President Joe Biden a win on an issue that might help him, particularly with younger voters. A January Pew Research poll found that 93% of voters ages 18-29 support legalizing cannabis for medicinal or recreational purposes.
California researchers could enjoy some benefits from rescheduling, too, said Igor Grant, a professor of psychiatry and director of Center for Medicinal Cannabis Research at UC San Diego.
Now, researchers have to obtain cannabis for their studies from the federal government. That requires a time-consuming and arcane process in order to comply with regulations about handling, storing and transporting the product, said Grant, who has been involved in cannabis research for more than two decades. It took more than a year to jump through the various federal hoops for one recent project the center was researching, he said.
“It's not like conducting a clinical trial with some new cancer drug. It's much much more complicated,” Grant said. “So this rescheduling is going to make that a lot easier.”
Lee has been at the forefront of cannabis reform for decades, focusing particularly on those who were incarcerated for violating weed laws. While she welcomed this new development, she urged lawmakers to lift the federal prohibitions that could help states like California, where many involved in the industry are struggling.
“It's a welcome step, it’s a major step,” Lee said. “But it’s not the final step.”
