The Ins and Outs of Rescheduling Marijuana at the Federal Level

In October 2022, President Joe Biden announced some of the most significant steps at the federal level in decades, positioning the United States for a potential shift in marijuana policy. First, President Biden announced that he was pardoning individuals convicted of federal simple possession of marijuana offenses, saying no one should be incarcerated just for using or possessing marijuana. Second, the President asked the Secretary of Health and Human Services and the Attorney General to review the federal scheduling of marijuana.

Nearly one year later, the Department of Health and Human Services issued a new recommendation. What does the recommendation mean for the marijuana industry, and where does the federal government go from here? The ins and outs of rescheduling marijuana at the federal level are complicated.

Department of Health and Human Services Recommends Rescheduling Marijuana

Almost one year after President Biden asked the Department of Health and Human Services to review the federal scheduling of marijuana, the federal organization announced it supported rescheduling marijuana from a Schedule I illegal substance to a Schedule III illegal substance. Currently, marijuana is a Schedule I illegal substance, meaning the government believes the drug has no accepted medical uses and has a high potential for abuse. Other Schedule I substances include heroin, LSD, and ecstasy. Schedule III substances are drugs that have a moderate to low potential for dependence. Common Schedule III drugs include ketamine, anabolic steroids, and pain relievers with less than 90 milligrams of codeine per dose.

The recommendation comes after one of the most comprehensive reviews of cannabis conducted by the federal government. The Department of Health and Human Services used data from the Food and Drug Administration to issue their recommendation to the Drug Enforcement Administration.

What Does Rescheduling Mean for the Cannabis Industry? 

Shifting marijuana from a Schedule I controlled substance to a Schedule III controlled substance may have a ripple effect. One of the potential benefits of rescheduling marijuana is that law enforcement agencies can shift their priorities, making marijuana offenses less of a target for officials. A reclassification could also mean researchers have greater access to study the drug, and medicinal products that contain cannabis could potentially receive approval from the Food and Drug Administration.

Rescheduling marijuana to a Schedule III substance may also positively impact the bottom line of the cannabis industry. Businesses selling marijuana are subject to a high tax rate and limited deductions because of its Schedule I designation. Section 280e of the Internal Revenue Tax code prohibits businesses from deducting business expenses from the gross income associated with Schedule I and II controlled substances. So, in addition to higher tax rates, cannabis businesses do not benefit from the standard business deductions other non-cannabis businesses can use to decrease their tax burden.

Rescheduling marijuana as a Schedule III substance would remove the Section 280e barrier, eliminating one of the most significant hindrances to the profitability of cannabis businesses in the United States.

Why does this matter? Consider the recent cannabis business bust in many parts of the U.S. Numerous cannabis producers are unable to compete in the marketplace, forcing them to shut their doors and leading to less competition and fewer cannabis innovations. Removing this financial burden from the shoulders of retailers and cultivators means more money for companies to innovate, grow, and expand. It may also lead to new sources of capital by way of new lenders. However, rescheduling would not necessarily open access to institutional banking, meaning passing the SAFE Banking Act legislation would still be an essential milestone in federal cannabis reform.

Disappointing News for Many Marijuana Advocates

The recommendation to reschedule marijuana at the federal level is one of the most significant and positive moves for the cannabis movement in recent memory. So why are cannabis advocates disappointed? Although rescheduling marijuana would be a meaningful step forward, many worry that the move falls short. Although listed in a less restrictive category, the substance would still be classified as illegal. Many cannabis advocates want to see marijuana decriminalized altogether, giving cannabis businesses free rein to access banking services and eliminating criminal penalties for marijuana possession and consumption, especially in minority communities disproportionally impacted by draconian drug policies.

What Comes Next?

Advocates for and against the new proposal shouldn’t count their chickens before they’ve hatched. The Department of Health and Human Services recommendation is only a small step towards overhauling marijuana policy in the United States. Next on the agenda? The U.S. Attorney General and Drug Enforcement Agency must review the HHS recommendation. The DEA has the authority to propose a rule change impacting the classification of marijuana at the federal level. Now, the agency and Attorney General must review the available evidence, review the criteria for rescheduling a substance as outlined by the Controlled Substances Act, and consider the recommendation by the HHS before ultimately deciding the fate of marijuana.

If the agency agrees with the HHS’s findings, the Controlled Substances Act requires the DEA to undergo a formal rulemaking procedure. The agency must open the question to public comment, publish a final regulation in the Federal Register, and include responses to public comments and their explanations for the proposed changes. Additionally, final regulations are subject to challenge and review in federal court. Essentially, it means there are still hurdles to overcome before changes regarding the rescheduling of marijuana can occur.

While the fate of marijuana legalization, decriminalization, and rescheduling at the federal level remains in the air, it is vital to recognize that progress slowly continues. Change is challenging. Although rescheduling marijuana to a Schedule III substance may not be the ultimate goal for cannabis enthusiasts, it does represent a significant milestone toward shifting cannabis policy in America. With incremental changes and more pressure from local and state lawmakers and the public, it feels like marijuana reform may be closer than ever before.

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