Marijuana classification change would alter tax collections

The Department of Health and Human Services has sent a letter to the Drug Enforcement Agency recommending that marijuana be reclassified to Schedule III, down from Schedule I, and if passed, the change could have an impact on how local governments collect taxes on cannabis businesses.

That’s the latest in the Biden Administration’s efforts towards marijuana reform. On top of his efforts to deschedule the drug, Biden has also urged his attorney general “to develop an administrative process for the issuance of certificates of pardon for eligible individuals,” Biden said, and urged governors to do the same.

White House Press Secretary Karine Jean-Pierre said in a briefing that the recommendations, which were based on an extensive Food and Drug Administration review of marijuana’s classification, are being reviewed in an independent process by the Department of Justice, which oversees the DEA, and that they’re “going to let that process move forward,” Jean-Pierre said.

While the descheduling would be a win for marijuana reform advocates who argue that it is long past time for marijuana to be removed from classification alongside drugs such as heroin and ecstasy, one of the largest impacts of rescheduling would be how marijuana businesses are taxed, law firm McGlinchey Stafford said.

Marijuana businesses are currently subject to Internal Revenue Code 280E, which forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances. The Reagan Era law makes it so that these businesses are often taxed at 70% or higher, the National Cannabis Industry Association said.

This wouldn’t necessarily affect the way states tax cannabis businesses, Daniel Shortt, associate at McGlinchey Stafford said. Eleven states currently allow local governments to levy standalone excise taxes that apply narrowly to cannabis purchases.

But the amount of tax revenue state and local governments take in from cannabis businesses could have wider effects down the road. States reported a combined $15.16 billion in tax revenue from recreational cannabis sales in 2022, not including revenue from medical marijuana, according to the Marijuana Policy Project and talks about issuing marijuana related municipal bonds, which would be repaid by the tax revenue generated from municipal bonds, have been buzzing around for a few years.

A 2020 report by MPG Consulting, formerly the Marijuana Policy Group, advocated for state and local governments to begin issuing Cannabis Municipal Bonds, or CMBs which would “most likely take the form of General Obligation or Revenue Bonds and will be repaid using tax and fee revenue from adult use retail cannabis sales,” the report said.

For the State of New York, a newcomer to the marijuana game having just legalized recreational use in 2021, a $1 billion CMB was among the proposals being pitched to promote diversity and help reach Gov. Kathy Hochul’s goal of awarding 50% of all licenses to sell marijuana to social equity applicants.

With the 2024 election season already underway, experts familiar with the matter said they wouldn’t be surprised if they saw approval of this measure by the DEA before the end of the year.