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What Biden's Move to Reclassify Marijuana Means for California

A demonstrator waves a flag depicting marijuana leaves during a protest in front of the White House on April 2, 2016.

Jose Luis Magana/Associated Press

The federal government's expected move to reclassify cannabis as a less dangerous drug could be a saving grace for struggling legal marijuana businesses in California — and potentially lead to lower prices for consumers.

The Drug Enforcement Agency is expected to reclassify cannabis into the Schedule III category of the Controlled Substances Act, similar to codeine and anabolic steroids, the Associated Press first reported. Previously it was in Category I and was equated with drugs such as heroin, which have no known therapeutic value.

“This move will address what California has known for nearly 30 years: cannabis has medicinal value,” said Nicole Elliott, director of the California Department of Cannabis Control. “It will enable new scientific research into the value and potential risks of the plant. It will also help create financial equity for businesses long burdened by unfair federal tax laws.”

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But — and there's always a “but” when it comes to cannabis-related regulations — don't expect the changes to happen overnight in California, which sold $4.4 billion worth of legal cannabis last year became.

Changes will not become apparent until next year at the earliest, as it will take at least months for the federal government to complete the reclassification process. Cannabis, like other Schedule III drugs, is still a federally controlled substance and is subject to criminal penalties for illegal trafficking in it.

Much of the potential good news in debt restructuring for California herbal companies lies in the fact that they are no longer subject to Section 280E of the federal tax code, which has long prohibited such companies from writing off standard business expenses such as payroll and insurance costs. If you deal in a Schedule I substance, you cannot claim federal tax deductions. Lee estimated that “this will save individual marijuana businesses thousands, if not millions, in excessive taxes.”

Eliminating those costs could help legal cannabis companies compete better in California, where weed taxes can be as high as 40% depending on how much a particular municipality wants 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%.

“With California cannabis companies having to deal with this really high state tax rate and then the federal tax burden, that's what makes it really, really difficult” to compete, Jain said. “If this federal tax penalty goes away, at least these California cannabis companies will have a fighting chance. If they have to deal with both state and federal tax burdens, it is almost impossible to run a sustainable legal cannabis business.”

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A third of cannabis cultivation companies have not renewed their licenses in recent years, and 15% of all cannabis companies in California are behind on their state tax payments, said Jain, who also sits on the board of the California chapter of the National Organization for the Reform of Marijuana Laws.

“They may not have failed yet, but this is a good sign that they are on the precipice of failure,” Jain said.

California's high tax burden trickles down to consumers. It's so difficult – and expensive – to sell cannabis legally that 70% of the weed consumed in California comes from the illegal market, which doesn't have to worry about whether taxes are factored into the sales price.

“A rampant illegal market has enormous consequences. “Closing the competitive gap between legal and illegal operators will help the state with its unique problem,” Jain said.

But many challenges remain.

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Many banks remain reluctant to get involved in cannabis businesses, forcing many to continue carrying their proceeds in cash, an often dangerous proposition. On Wednesday, Senate Democrats, led by New York Senate Majority Leader Chuck Schumer, introduced legislation calling for an end to the federal ban on cannabis. But supporters fell far short of reaching the 60-vote threshold required for a vote.

Schumer and other Democrats reiterated their support for the Secure and Fair Enforcement Regulatory Banking Act, which passed the Senate Banking Committee last fall with support from three Republicans. The measure would allow banks to lend to cannabis companies in states where the product is legal.

But Congress probably won't do much in an election year. Republicans in Congress will not want to hand President Joe Biden a victory on an issue that could help him, especially among younger voters. A Pew Research poll in January found that 93% of voters ages 18 to 29 support legalizing cannabis for medical or recreational purposes.

California researchers could also benefit from rescheduling, said Igor Grant, professor of psychiatry and director of the Center for Medical Cannabis Research at UC San Diego.

Researchers now have to purchase cannabis from the federal government for their studies. “This requires a time-consuming and opaque process to comply with regulations on handling, storing and transporting the product,” said Grant, who has worked in cannabis research for more than two decades. A current project the center was researching took more than a year to navigate through various federal hurdles, he said.

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“It’s not like doing a clinical trial of a new cancer drug. It’s much, much more complicated than that,” Grant said. “So this rescheduling will make that a lot easier.”

Lee has been at the forefront of cannabis reform for decades, with a particular focus on those incarcerated for violations of cannabis laws. While she welcomed this new development, she called on lawmakers to lift federal bans, which could help states like California, where many industry players are struggling.

“This is a welcome step, it’s a big step,” Lee said. “But it’s not the final step.”

Reach Joe Garofoli: [email protected]; Twitter: @joegarofoli

Anna Harden

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