This piece was co-written by Robert Hoban and Hirsh Jain
In November 2020, the United Nations made substantial revisions to the classification of cannabis under the UN Convention on Narcotic Drugs. This significant move signaled the beginning of the end for cannabis prohibition. Or did it?
In October 2022, President Biden directed the Department of Health and Human Services (HHS) to reconsider whether the classification of cannabis as a Schedule I drug under the Controlled Substances Act was appropriate in light of current medical science.
Despite President Biden’s deserved reputation as being hostile to drug policy reform, this move was somewhat unsurprising. As part of his 2020 presidential campaign, President Biden promised he would take formal steps to ease restrictions on marijuana if elected to the Presidency. Moreover, the repeated failure of Congressional efforts to reform federal cannabis policy may have prompted the White House to advance this policy.
Less than a year later, in August 2023, the HHS issued a recommendation to the Drug Enforcement Administration that marijuana be reclassified from a Schedule I to a Schedule III drug. After all, grouping cannabis with substances like heroin (Schedule I) or OxyContin (Schedule II) doesn’t align with the prevailing scientific consensus on its relative harm and medical utility.
If the recommendation is approved, marijuana would no longer be listed as a dangerous substance like heroin or LSD and it would reduce or potentially eliminate criminal penalties for possession. The decision rests with the DEA, which has rarely, if ever, rejected a rescheduling recommendation from HHS. The DEA will consider marijuana reclassification under three criteria:
- Its potential for abuse;
- Its potential for medical use; and,
- The extent to which it’s unsafe or addictive.
Once the it comes to its decision, the DEA will submit its own recommendation as a proposal to the attorney general, who will then make a final ruling. In short, there are several steps ahead. All we can do is stay tuned in that regard.
Of course, it is important to note that “marihuana” has been a restricted “narcotic” in the U.S. since 1914 under the Harrison Act, and was even more directly restricted under the Marijuana Tax Act of 1937. Then, after the United States became a signatory to the UN Convention on Narcotic Drugs, it chose to do so by ultimately adopting the Controlled Substances Act in 1970, which placed all substances that were in some manner regulated under existing federal law into one of five schedules, including but not limited to “marihuana.”
The recent HHS recommendation concerning marijuana rescheduling has wrangled cannabis industry activists, who have persistently calling for the descheduling of marijuana. There is some validity to this preference as there are vast differences in the risk profile of cannabis and other Schedule III drugs, such as Tylenol. Moreover, a Schedule III designation for cannabis seems difficult to defend in light of the fact that alcohol and tobacco, which kill hundreds of thousands of Americans, are not scheduled at all.
Nonetheless, it’s safe to say that the U.S. does not want to run further afoul of the United Nations. Descheduling the plant would clearly put the U.S. in direct conflict with its obligations under the 1961 U.N. Convention (as amended), which requires some form of “medical treatment” of cannabis to fulfill its obligations thereunder. This would be vastly different than merely being passive in the face of state-based legality for our federal government.
It is important to note that progress on cannabis reform has always been incremental, owing to the deep stigma against the cannabis plant that has long been embedded in the American consciousness. The progress made on cannabis reform over the past several decades suggests that incremental progress is the most realistic and effective way to eradicate this stigma.
In fact, the limited nature of vocal opposition from the GOP to the HHS recommendation reflects well on the political calculus made by the Biden administration to incrementally ease restrictions on cannabis. Moreover, a descheduling order by President Biden would be more susceptible to legal challenge than a rescheduling. This suggests that descheduling cannabis entirely was never realistic at this moment in history.
You will hear that both alcohol and tobacco are not deemed controlled substances under the CSA; in effect, these substances have been descheduled. The reason that alcohol and tobacco—both substances with abuse potential—are not considered controlled substances is that Congress specifically exempted “distilled spirits, wine, malt beverages, or tobacco” from the CSA. In other words, while it may make policy sense to treat cannabis in the same manner as alcohol and tobacco, doing so would require congressional legislation.
Congress has not been particularly enamored with the cannabis industry lobby, nor its operators to date. Political will matters here. Unless, and until, the cannabis industry includes widespread participation by Fortune 500 companies and traditional, longstanding CPG companies, it is not likely that the marijuana sector will truly be recognized for its viability and sophistication. From a cynical perspective, it is only when wealthy long standing interests operate in the cannabis industry on a widespread basis, that Congress will be compelled to take substantial steps on the industry’s behalf.
As a practical matter, HHS was never in a position to recommend descheduling under its governing assessment standards, which include:
(1) Its actual or relative potential for abuse.
(2) Scientific evidence of its pharmacological effect, if known.
(3) The state of current scientific knowledge regarding the drug or other substance.
(4) Its history and current pattern of abuse.
(5) The scope, duration, and significance of abuse.
(6) What, if any, risk there is to public health?
(7) Its psychic or physiological dependence liability.
(8) Whether the substance is an immediate precursor of a substance already controlled under this subchapter.
Despite the depth of science, given these legally binding factors, HHS was never likely to recommend descheduling. Congress had already affected the most sweeping change in U.S. cannabis policy in 2014, and again in 2018, when it enacted the Farm Bill expressly removing all THC – and all derivatives from the hemp plant – from the CSA. Therein lies the political debate, and the reason that Congress is not likely (in its current iteration) to take steps to loosen restrictions on marijuana – the dug-in political positions each party has taken with regard to ‘marihuana,’ on the one hand, and ‘hemp,’ on the other.
In sum, at this point in time, descheduling was never really a viable pathway, and never realistic. We have to deal with the potential implications of what rescheduling to Schedule III does and does not do.
The fiscal ramifications of such a shift are compelling. A move to Schedule III or lower would liberate the cannabis industry from the punitive taxation imposed by Internal Revenue Service (IRS) Code Section 280E, which currently applies only to Schedule I and II substances. This change would disproportionately benefit smaller cannabis operators, who are generally able to claim fewer tax exemptions than large, vertically integrated operators and who lack the capital reserves to fund losses over a long period of time. Moreover, it would forestall the trend toward consolidation in the cannabis space, which is often driven by the need for distressed operators to ensure their survival by aligning with larger operators.
Perhaps most notably, consumers would be the most significant winners of the elimination of the 280E tax penalty. The immense tax burden on legal cannabis businesses is passed on to consumers in the form of higher prices. A reclassification would likely make legal cannabis products more price-competitive, benefiting consumers and shrinking the cost disparity between regulated and unregulated markets. This, in turn, will help mitigate the vast illicit cannabis market in the United States, which by its very operation jeopardizes public health, public safety, and the environment. However, 280e has always been the federal government’s cut, if you will. If 280e was eliminated, we’d likely see that collected somewhere else, such as an excise tax, or the like. Stand by for an answer to that one.
Some advocates have expressed concern about what a Schedule III designation may mean for the FDA’s role in regulating the cannabis industry. These individuals point to the FDA’s intransigence in allowing a market to develop for hemp-derived CBD products. However, concerns about the FDA’s role appear to be exaggerated. Rescheduling to Schedule III would grant the FDA no greater enforcement authority than it currently possesses. Moreover, while the FDA technically has the ability to regulate cannabis products under the Food Drugs and Cosmetics Act (FDCA), nothing about a Schedule III designation would appropriate the FDA the resources required to engage in enforcement. There is no reason to believe that the FDA, with its finite resources, would deprioritize, say, meat inspection, to focus instead on cannabis.
The federal government’s acknowledgment of the medical utility of cannabis also has immense symbolic power. It would be the first time in modern history the federal government has acknowledged the medical efficacy of cannabis. That, in turn, can provide greater momentum to cannabis efforts at the state and federal levels. Shortly after the HHS announcement, the U.S. Senate has seen renewed interest in the SAFE Banking Act, expected to pass the Senate Banking Committee for the first time. Potential legalization efforts in Ohio, New Hampshire, Pennsylvania, and Florida may receive a boost from the emerging consensus that cannabis has medicinal value and is not merely a “recreational drug.”
A Schedule III designation may also make the financial infrastructure of the U.S. economy more friendly to cannabis. To be clear, the continued federal illegality of state-legal cannabis programs under a Schedule III classification could still deter banks from serving cannabis businesses and major stock exchanges from listing cannabis companies. However, these institutions still have a large degree of discretion, as evidenced by the fact that some banks and exchanges do today work with cannabis companies. A Schedule III designation may increase the number of banks willing to serve cannabis companies, benefiting the entire industry through better rates. It could also expedite the day when the NYSE and Nasdaq list plant-touching US cannabis operators, helping renew investor interest in the space. This in turn would benefit the entire industry, which has suffered in recent years due to a lack of capital investment.
At the end of the day, it is doubtful that most, if not all, existing U.S.-based cannabis businesses could comply with the requirements that exist for the formulation, production, distribution, and sale of a Schedule III substance. This means that even though the above-referenced consequences would be beneficial to the existing dispensary system, it is not likely that the system would comply with the stringent requirements for a Schedule III operator under the existing federal laws and regulations. In other words, even if this were to occur, there would need to be some sort of federal government carve out, budgetary like Rohrabacher-Farr, and/or policy-based like the Cole/Ogden Memos, for the existing state-based dispensary system. The states are not going to give up the jobs and the revenues that are currently a product of the existing system.
In conclusion, reclassifying cannabis as a Schedule III substance would be a win for businesses, consumers, and common sense, but was never realistic in the current environment. By aligning the legal status of cannabis with both scientific consensus and practical fiscal policy under Schedule III, we can create a more effective business environment for this emerging industry. This could be a pivotal moment in drug policy, an opportunity for federal regulators to finally right some of the historical wrongs and set the stage for a more equitable future.