No one should be surprised that American attitudes toward cannabis and cannabis legalization have evolved significantly since President Richard Nixon signed the Controlled Substances Act (“CSA”) into law in 1970. Cannabis, once associated with the War on Drugs, has become big business, with the state-legal cannabis market in the United States expected to exceed $40 billion by 2026.
With 60 percent of adults believing that marijuana should be legal for both medical and recreational use, support for full federal legalization is at an all-time high. This is consistent with the fact that, in most states, Americans now have access to either medical or adult-use cannabis under state laws: Since 2012, 18 states and Washington, D.C. have legalized adult-use marijuana, while 37 states have legalized medical marijuana.
The fact that the industry is still federally illegal has very real consequences: the cost of capital remains high, federal protections (such as bankruptcy and trademarks) are out of reach, banking access is limited, and many tax breaks are unavailable. And, as recent prosecutions have demonstrated, federal authorities will step in from time to time, frequently unleashing a slew of powerful tools available to them under federal law in dealing with industry participants who cross the line. This is a lesson that the defendants in United States v. Akhavan, a case out of the Southern District of New York, recently learned after being convicted of attempting to circumvent bank payment processing policies.
In practice, the continuation of federal prohibition means that there is no national market for state-legal cannabis. Instead, there are dozens of individual, isolated markets where cannabis trafficking across state lines is strictly prohibited.
While federal cannabis legalization does not appear to be a priority for the Biden administration, efforts in the House and Senate to align federal policy with state laws continue. As a result, now is a good time to consider what federal legalization efforts might look like in the short and long term.
In the short term, the infrastructure must be protected.
As previously stated, state-legal marijuana-related businesses (“MRBs”) pay more for services that many other business owners take for granted, such as banking and insurance. Several bills have been introduced in recent legislative sessions to address these bottlenecks.
The Secure and Fair Enforcement (“SAFE”) Banking Act, which has been passed by the House five times, appears to be the most promising (although it has never made it through the Senate).
The SAFE Banking Act would make it illegal for federal regulators to penalize financial institutions for providing banking services to state-legal MRBs. Penalties prohibited include terminating or limiting a depository institution’s deposit insurance or share insurance solely because the institution provides financial services to legitimate MRBs, as well as prohibiting or otherwise discouraging a depository institution from providing financial services to such a business. Furthermore, proceeds from a transaction involving legitimate MRB activities would not be considered proceeds from unlawful activity (and, therefore, would not be subject to anti-money laundering laws).
A similar bill, the Clarifying Law Around Marijuana Insurance Act, was introduced for the insurance industry (“CLAIM Act”). That bill would prohibit federal agencies from penalizing or discouraging an insurance company from doing business with MRBs that are operating in accordance with state and local law. The CLAIM Act expressly states that insurance companies may not be held liable under any federal law or regulation solely for conducting insurance business with an MRB.
These bills, which are backed by powerful, legitimate industries, receive bipartisan support that broader legalization bills do not.
Long-term cannabis rescheduling or de-scheduling
Two ambitious bills have recently been introduced in Congress with the goal of effectively ending federal cannabis prohibition. The Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act of 2021, introduced in the House, would remove cannabis from the CSA and expunge cannabis convictions. Furthermore, the Act would generate federal tax revenue by imposing a 5% tax on retail cannabis sales, which would rise to 8% over three years. This tax revenue would be used to fund the federal Opportunity Trust Fund, which would then be used for community reinvestment.
The MORE Act was reintroduced in the House on May 28, 2021, and is currently in the legislative process. A similar bill, known as the Cannabis Administration Opportunity Act, was introduced in the Senate (“CAOA”). CAOA, like the MORE Act, would decriminalize and declassify marijuana on a federal level. While CAOA recognizes state law as controlling cannabis possession, production, and distribution, the law would prohibit states from interfering with interstate commerce where a lawful cannabis delivery requires transportation through the state’s borders. This is similar to how hemp preemption was structured in the 2018 Farm Bill.
CAOA also proposes a federal excise tax of 10% on cannabis in the first year of the bill’s implementation, rising to 25% after five years. A portion of this tax revenue would be reinvested in communities harmed by the War on Drugs.
These bold proposals do not have the bipartisan support that the SAFE Banking Act does. Similarly, the Biden administration does not appear to be particularly enthusiastic about adult-use cannabis legalization. And, while the Biden administration appears to be open to moving cannabis from the more restrictive Schedule I to Schedule II under the CSA, there has been no detailed proposal to do so.
According to a recent Congressional Research Service (“CRS”) report, the president could take certain steps to effect such changes without the approval of Congress by exerting influence over agencies that control the re-scheduling process (namely the DEA, HHS and the FDA). This is not a new idea, and the report was quickly criticized by Professor Robert A. Mikos, one of the nation’s leading experts on federalism and drug law, who has long argued that the authority to re-schedule drugs under the CSA is much more limited than CRS’s report implies.
Legalization Done Right
There are legitimate concerns among the various stakeholders — who are far from a unified bloc — about getting federal legalization right. When it comes to the piecemeal approach of the SAFE Banking Act and the CLAIM Act, advocates are concerned that passage will derail the overall momentum of broader legalization, as established business interests may feel protected as a result of passage.
At the same time, some stakeholders are concerned about the rapid de-scheduling of cannabis because it will allow established companies that are already operating in major markets to use economies of scale to dominate the market, thereby pushing out start-ups and competitors (including social equity applicants that enjoy certain advantages under current state cannabis laws). And, if recent experience with hemp and CBD is any indication, federal regulators are likely to reassert their authority as soon as cannabis is de-scheduled. Unless the groundwork for legalization is laid out ahead of time, legal uncertainty will simply be replaced by regulatory uncertainty.