“By aligning the legal status of cannabis with both scientific consensus and practical fiscal policy, we can create a more effective business environment for this emerging industry.”
By Ari Hoffnung, Bridge West Consulting
It is exciting to consider the possibility that the Drug Enforcement Administration (DEA) may follow the U.S. Department of Health and Human Services’s (HHS) recommendation to reclassify cannabis from a Schedule I to a Schedule III controlled substance. This would overturn a deeply flawed policy from the era of the Nixon administration, a policy that has been in place for more than 50 years.
From a scientific standpoint, this reclassification is not just appropriate but also overdue. Grouping cannabis with substances like heroin (Schedule I) or OxyContin (Schedule II) doesn’t align with the prevailing scientific consensus on its relative harm.
The fiscal ramifications of such a shift are equally 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 Schedules I and II substances.
Taxing cannabis businesses in the same manner as other businesses would help boost the entire legal cannabis industry, from large, publicly traded multi-state operators to local dispensaries.
Among all stakeholders, consumers would be the most significant winners. A reclassification would likely make legal cannabis products more price-competitive, shrinking the cost disparity between regulated and unregulated markets.
This would also have a positive impact on state and local tax revenue collections. Many states—even those with more mature cannabis markets like California—have seen significant declines in tax revenue collections. This decline is partly due to the proliferation of illicit dispensaries, now as ubiquitous in places like New York City as Starbucks or Dunkin’ Donuts.
Moving cannabis to Schedule III could mark the beginning of the end for these illicit operations. Let’s be clear, their primary edge isn’t superior product or service but their ability to evade high taxes. While calls for increased investment in enforcement are understandable, a fairer taxation system would certainly offer a more effective and sustainable solution.
Moreover, the reclassification of cannabis could have long-term benefits that extend beyond immediate fiscal and consumer advantages. For instance, moving cannabis to Schedule III could pave the way for more comprehensive and federally funded research into its medical benefits. Currently, the Schedule I status of cannabis severely hinders research in the United States, limiting our understanding of its potential benefits and risks.
It should also be noted that administrative descheduling of cannabis was never a possibility, since the Controlled Substances Act of 1970 (CSA) requires that all drugs with abuse potential be placed on one of five schedules. While cannabis has a low abuse potential, no reasonable scientist would argue that it has no abuse potential.
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.
In conclusion, reclassifying cannabis as a Schedule III substance would be a win for businesses, consumers and common sense. By aligning the legal status of cannabis with both scientific consensus and practical fiscal policy, 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.
Ari Hoffnung is a partner at Bridge West Consulting, an affiliate of Bridge West, one of the first accounting firms in the world to focus solely on the cannabis industry. He previously served as chief operating officer of Vireo Health and as New York City’s deputy comptroller.
Photo courtesy of Philip Steffan.