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This Landmark Marijuana Bill Would Move Cannabis to Schedule III

By Sean Williams - Apr 16, 2017 at 8:12AM

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New legislation would remove most of the pot industry's inherent disadvantages. Too bad it'll probably fall on deaf ears in Washington.

The Marijuana industry is growing rapidly, and at the moment it seems as if nearly everyone wants in.

According to cannabis research firm ArcView, legal cannabis sales in North America surged by 34% last year to $6.9 billion, and by 2021, sales of legal weed are expected to top $22 billion. Investment firm Cowen & Co. is arguably even more bullish, calling for $50 billion in legal pot sales by 2026, which works out to a compounded annual growth rate of more than 23%.

Jars filled with cannabis stacked one upon another.

Image source: Getty Images.

This growth rate is all thanks to the rapidly changing opinion of the public and a number of legislators in select states. National pollster Gallup, which has been keeping tabs on the public's opinion of marijuana for nearly 50 years, notes that 60% of respondents were in favor of a national legalization in its 2016 poll, an all-time high. Comparatively, just 25% felt the same way back in 1995.

Select states have also been eager to legalize pot given the opportunity to collect tax revenue and licensing fees. For instance, Colorado wound up generating nearly $200 million in tax and licensing revenue last year after bringing in around $135 million in 2015. This revenue helps support the state's school system, as well as law enforcement and drug abuse and education programs.

Marijuana's federal "glass ceiling"

Yet, no matter how far marijuana seems to reach at the state level, it always has a glass ceiling hanging over its head in the form of the federal government. On Capitol Hill, cannabis remains a schedule I drug, meaning it's illegal and is deemed to have no medical benefits. Being listed as a schedule I substance comes with a number of inherent disadvantages.

For starters, weed businesses have very little or no access to basic banking services. Since financial institutions normally report to the Federal Deposit Insurance Corporation (FDIC), and the FDIC is a federally created entity, loaning money to pot businesses or even opening a checking account for them could be construed as money laundering. If the federal government wanted to strictly enforce federal law at some point down the road, financial institutions that were caught offering basic banking services to cannabis businesses could face fines and/or criminal charges.

A judge's gavel next to a book entitled "Federal and State Marijuana Laws."

Image source: Getty Images.

Companies that sell federally illegal substances like marijuana also get shafted come tax time. U.S. tax code 280E disallows businesses that sell federally illegal substances from taking normal business deductions, which ultimately leaves these companies to pay far more in taxes than any normal business would.

Research is constrained as well. Lawmakers on Capitol Hill have often suggested that they'd be more willing to consider rescheduling marijuana if there were more clinical evidence of its benefits and risks available. However, the Catch-22 is that this data isn't easy to obtain because of the strict scheduling of cannabis as a schedule I substance.

However, there may be a middle ground to be found.

This landmark marijuana bill would change the game

Last week, two members of the House, Rep. Matt Gaetz (R-Fl.) and Rep. Darren Soto (D-Fl.), proposed new legislation that would remove marijuana as a schedule I substance and reinstitute it as a schedule III substance. Bypassing schedule II and going straight to schedule III would remove a number of key restrictions on the industry.

For instance, manufacturers of schedule III substances can indeed obtain basic banking services, which means access to loans to grow their business, as well as checking accounts. Having to deal in cash is a major security concern for pot businesses today.

Schedule III substances also don't fall under the control of U.S. tax code 280E. This would mean that medical cannabis businesses would be able to take normal tax deductions, thus paying tax on their net profits as opposed to gross profits. Being able to hang onto more of their income could help with expansion and hiring.

A scientist in a lab coat making notes in a marijuana grow field.

Image source: Getty Images.

As a schedule III drug, it would also be considerably easier for researchers to examine the benefits and risks of the drug without first gaining federal approval to run studies. Select clinical trials pertaining to various forms of epilepsy, glaucoma, cancer, pain, and diabetes, have shown promise, and this new bill would make it significantly easier for additional research to be conducted.

Most importantly, it would put the onus of responsibility back on the states since it would effectively be decriminalizing medical marijuana across the U.S. Though consumers would probably prefer to see a complete descheduling of pot, allowing states to regulate their own medical weed industry is a consolation prize that marijuana proponents would probably gladly accept.

A gesture that'll fall on deaf ears

This isn't the first marijuana reform bill that's been proposed in Congress, and it's unlikely to be the last. However, like all marijuana reforms proposed before it, Gaetz's and Soto's bill is likely to fall on deaf ears in Washington.

In February, White House press secretary Sean Spicer signaled a change in the way the Trump administration will handle the enforcement of cannabis at the federal level. While it's looking unlikely that the administration will step up enforcement on medical marijuana, which is good news for the 28 states that have legalized the substance, it's disconcerting news for the eight states that have legalized recreational pot, and the other states that have considered doing so.

President Trump addressing Department of Homeland Security employees.

Image source: U.S. Department of Homeland Security, Flickr.

No one is entirely sure what sort of enforcement the Trump administration has in store for the pot industry, but with Attorney General Jeff Sessions at the reins of the Justice Department, one can only assume the worst. While in the Senate, Sessions was arguably the most ardent opponent of marijuana's expansion.

The industry also missed out on an opportunity to have the Drug Enforcement Agency (DEA) reschedule marijuana this past summer. Despite two petitions to do so, the DEA decided that there wasn't sufficient existing benefits data to merit a change from schedule I. The DEA often takes years to hear petitions of this nature, so it'll likely be years before cannabis has a shot at another DEA review.

Considering that President Trump has a laundry list of objectives still to tackle (healthcare, tax reform, and infrastructure), marijuana simply isn't anywhere on his list.

For current and prospective marijuana stock investors, this isn't good news. It means the perpetuation of inherent disadvantages that make profitability seem like a pipedream for most marijuana stocks. For the time being, the safest place for investors remains firmly planted on the sidelines.

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