What Rescheduling Marijuana Would and Wouldn't Do

Although it would leave federal prohibition essentially untouched, the change would facilitate medical research and dramatically reduce taxes on state-licensed suppliers.

The Department of Health and Human Services (HHS) this week recommended that the Drug Enforcement Administration (DEA) move marijuana from Schedule I of the Controlled Substances Act, the most restrictive category, to Schedule III, where it would join medications such as Tylenol with codeine, buprenorphine, and anabolic steroids. The DEA has the final say on rescheduling decisions, and it is not clear whether it will agree with HHS, especially given its longstanding opposition to reclassifying marijuana, or how long it might take to decide. But if cannabis is eventually moved to Schedule III, that change would signal a new understanding of the drug's risks and benefits. It also would facilitate cannabis research, and it would have important tax implications for state-licensed marijuana businesses. At the same time, it would leave federal marijuana prohibition essentially untouched.

The HHS recommendation is a product of the regulatory review that President Joe Biden ordered last October, when he also announced a mass pardon for people convicted of simple marijuana possession under federal law. At the time, Biden said "it makes no sense" to "classify marijuana at the same level as heroin," and HHS evidently agrees. That category, which also includes psychoactive substances such as LSD, psilocybin, peyote, MDMA, and methaqualone, supposedly is reserved for drugs with a "high potential for abuse" that have no recognized medical use and cannot be used safely even under a doctor's supervision.

Abuse potential is in the eye of the beholder. As the DEA tautologically sees it, any use of a prohibited drug is "abuse" by definition. But the notion that marijuana is so dangerous that it cannot be safely used "under medical supervision" is pretty perplexing, given that its side effects compare favorably to those of many prescription drugs. The idea that marijuana has "no currently accepted medical use in the United States" likewise is hard to reconcile with reality.

Way back in 1985, the Food and Drug Administration (FDA) approved Marinol (a.k.a. dronabinol)—a synthetic version of THC, marijuana's main active ingredient—as a treatment for the nausea and vomiting caused by cancer chemotherapy. It later expanded that approval to include AIDS wasting syndrome. Five years ago, the FDA approved Epidiolex, which contains cannabis-derived CBD, as a treatment for two forms of severe, drug-resistant epilepsy.

Many studies indicate that marijuana is effective at relieving various symptoms, including neuropathic pain and muscle spasms as well as nausea and epileptic seizures. Based on such findings, 38 states allow medical use of cannabis.

By moving marijuana to Schedule III, which is the same category to which THC products like Marinol have been assigned, the DEA would be deciding that cannabis has "a potential for abuse less than substances in Schedules I or II," although "abuse may lead to moderate or low physical dependence or high psychological dependence." The DEA also would be recognizing that marijuana has medical applications, although it still could not be legally used except in the form of an FDA-approved product available only by prescription.

Rescheduling marijuana would make it easier to conduct the sort of research that might pave the way to winning FDA approval of specific cannabis-based medications. Marijuana's Schedule I status entails special regulatory requirements that create hassles for scientists.

"The biggest obstacle, at least historically, to doing research on marijuana to prove its medical benefit is that it's in Schedule I," Dan Riffle, then director of federal policies at the Marijuana Policy Project, told me in 2014. "So you had that Catch-22, where marijuana is a Schedule I drug because there's no evidence, and there's no evidence because marijuana is a Schedule I drug."

The late Harvard psychiatrist Lester Grinspoon, co-author of Marihuana: The Forbidden Medicine and a leading expert on cannabis, agreed that marijuana's Schedule I status had impeded research. "Since 1970," he said, "it has been the major reason why the kinds of large double-blind studies which have been the basis for FDA approval of medicines since the mid-1960s have been impossible to pursue in this country." Dale Gieringer, who runs the California chapter of the National Organization for the Reform of Marijuana Laws, noted that "there are very burdensome registration requirements and regulations regarding Schedule I substances." Although "most of them also apply to Schedule II," he said, they do not apply to substances in Schedules III through V.

"The moment that a drug gets a Schedule I [designation], which is done in order to protect the public so that they don't get exposed to it, it makes research much harder," National Institute on Drug Abuse Director Nora Volkow, whose agency participated in the HHS review, noted during congressional testimony in 2019. "This is because [researchers] have to go through a registration process that is actually lengthy and cumbersome."

Another immediate effect of designating marijuana as a Schedule III drug would be felt by businesses that sell cannabis products in compliance with state law. Under Section 280E of the Internal Revenue Code, a provision aimed at illegal drug traffickers, those suppliers are not allowed to deduct standard business expenses when they file their federal tax returns—although, counterintuitively, they can deduct the "cost of goods sold," meaning that marijuana itself is deductible, while all the other expenses associated with selling it, such as rent and payroll, are not.

The upshot is that marijuana businesses can owe money to the IRS even when they don't turn a profit, while those that do make money are subject to much higher effective tax rates than other businesses are. In one hypothetical example offered by the cannabis consulting firm Greenleaf HR, an ordinary business pays an effective tax of 30 percent, while a marijuana business with the same gross income and expenses pays an effective tax of 70 percent.

Crucially, Section 280E applies only to businesses that sell drugs in Schedule I or Schedule II (which includes many prescription opioids, along with cocaine, amphetamines, Ritalin, and some barbiturates). If cannabis becomes a Schedule III drug, marijuana merchants will be able to claim the same tax deductions as other businesses.

"I cannot emphasize enough that removal of § 280E would change the industry forever," cannabis lawyer Vince Sliwoski writes. "Having worked with cannabis businesses for 13 years, I view taxation as the largest affront to marijuana businesses—more than banking access, intellectual property protection problems, lack of bankruptcy, you name it. This would be HUGE." In addition to making it much easier to turn a profit, he says, the tax change would help attract investors and give marijuana businesses "more leverage" in negotiating those deals.

Despite that big benefit, marijuana merchants would still be breaking federal law every day because they would still be selling a controlled substance without federal approval. Although CNN suggests that rescheduling marijuana would "allow cannabis businesses to bank more freely and openly," financial institutions that are leery of serving the industry because it is illegal probably would not be much more enthusiastic when it is still illegal but subject to less severe criminal penalties. They still would face the risk of charges such as money laundering, and they still could be subject to civil forfeiture and potentially devastating regulatory penalties.

"The banking thing will not be fixed," Sliwoski notes. "At Schedule III, marijuana would still be a controlled substance and state-licensed businesses would still be 'trafficking' in a controlled substance, contrary to federal law. As someone who has advised many banks and credit unions on cannabis…I'm here to tell you that the analysis for financial institutions won't fundamentally change."

The SAFE Banking Act, which would remove the threat of those consequences for banks that serve state-licensed marijuana businesses, is one way to address that problem, which has resulted in a heavy reliance on cash that invites sometimes-lethal robberies. A better way would be to repeal the federal ban on marijuana by descheduling the drug instead of merely moving it to a different, somewhat less illegal category.

That reform, which two-thirds of Americans support, would simultaneously address all the other hazards caused by the conflict between federal prohibition and state marijuana laws, including the laws that allow recreational as well as medical use in 23 states. Marijuana then would have the same status as alcohol and tobacco, widely used recreational intoxicants that are not considered "controlled" substances at all.