The Goldilocks Option Of Cannabis Reform

jar of cannabis Goldilocks
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The Biden administration may take an important step toward legalizing pot – the Goldilocks option. Here’s what rescheduling cannabis will actually do.

Last month, news broke that the U.S. Department of Health and Human Services wants to legalize weed—kind of. On Aug. 30, Bloomberg reported that the agency formally recommended that the federal government downgrade the drug from a “Schedule 1” substance—where it has sat for decades alongside LSD and heroin—to the much less severe “Schedule 3.” If its proposal goes through, it would be the most significant change in federal marijuana policy since prohibition began in 1937, and a major rollback of the punitive war on drugs, which has dominated American drug policy for 50 years.

The HHS recommendation stems from an order President Joe Biden gave last October, when he pardoned 6,500 low-level pot offenders (none of whom were still in prison) and asked his administration to reconsider the drug’s legal status. The move now goes to the Justice Department, which could approve it before the presidential election. “It’s pulling the pin on the grenade” of federal legalization, California cannabis entrepreneur Eric Spitz told me.

Schedule 3 is not technically legalization, though. What does the change actually mean?

The 50-year-old “schedule” system is a mess. It includes both FDA-regulated pharmaceuticals and street drugs, which are the purview of law enforcement. It makes little sense that weed, which doesn’t cause fatal overdoses, is more tightly restricted than, say, Schedule 2 fentanyl, which causes tens of thousands of them annually. And it hasn’t ever made sense that the federal government legally considers pot as dangerous as heroin and more dangerous than cocaine.

Until now, the feds’ official position has been that marijuana, as a Schedule 1 drug, has no medical value and high potential for abuse. Such drugs have virtually no place in law-abiding society. But that status has become laughable as well over 20 states legalized weed and created regulated industries for it. Schedule 2 drugs, which include fentanyl, cocaine, methamphetamine, and various prescription opiates, also have high potential for abuse, but the government acknowledges that they have some medical value. There are legal, pharmaceuticalized forms of these drugs, but the street forms are illegal.

HHS has proposed moving marijuana to Schedule 3, where it would join ketamine, anabolic steroids, and testosterone, a hodgepodge of drugs to which weed has no obvious connection. (There are also schedules 4 (Xanax, Valium) and 5 (cough syrup with codeine.)

Schedule 3 would do two things that the cannabis world has celebrated. First, it would be an acknowledgment by the federal government that marijuana has medical value. About 40 states have recognized this in law, though they have differing views of what those medical benefits are. Second, it would end a tax rule known as 280E that the cannabis industry hates.

Passed by Congress as a performative anti-drug measure in 1982, 280E prohibits organizations that sell Schedule 1 or Schedule 2 drugs from deducting expenses on their taxes. When state-licensed marijuana dispensaries opened three decades later, they found themselves subject to the rule, which pushed their effective tax rate far higher than that for other U.S. businesses. If the Schedule 3 recommendation is accepted by the DOJ, legal cannabis companies would finally be able to write off some costs with the government like any other business.

At the same time, the move to Schedule 3 could further confuse marijuana’s already confusing legal status. Now that 23 states have legalized recreational cannabis, pot has at least four distinct legal statuses in the U.S.: 1) products produced and sold in state-licensed industries; 2) products produced and sold on the illegal market; 3) FDA-approved pharmaceuticals derived from cannabis; and 4) intoxicating products derived from hemp—cannabis containing a de minimis amount of THC—which was legalized federally in the 2018 Farm Bill. (That last category is often sold in gas stations and head shops in states that haven’t legalized.)

Rather than remain in the scheduling system, the $25 billion cannabis industry, which only sells state-legal products, wants the drug to be descheduled entirely. This would, at least in theory, normalize the plant and its industry. Among other things, licensed businesses would be able to sell products across state lines and have access to banks, stock markets, and the rest of the financial system. None of that is true now. Descheduling would put cannabis alongside products like alcohol, tobacco, and dietary supplements, which are federally regulated but not scheduled.

In a webinar last month, three lawyers with cannabis experience predicted a move to Schedule 3 not because it said anything about weed’s associated benefits and risks, but because it was the government’s “Goldilocks” option: a feasible compromise for the federal bureaucracy that made progress—ending the hated tax rule—but didn’t go too far.

Though it’s not the industry’s ideal option, Schedule 3 would still be a boon for companies in the weed business. Even as cannabis consumption rises, 280E and other challenges stemming from the contradictions in federal and state law have made it very difficult for these companies to make money. In recent years, the weed bubble burst.

Those hard times changed with the HHS recommendation. Pot stocks, which have been in freefall since early 2021, are up about 90 percent on hopes of a tax cut and some related benefits. (Disclosure: I have about $2,800 in MSOS, an exchange-traded fund of industry stocks .) Those in the cannabis world who would benefit the most from the tax cut have welcomed the move as a steppingstone to full descheduling.

The problem with Schedule 3, though, is that it wouldn’t resolve the contradictions of weed’s legal status. Now, with cannabis as a Schedule 1 substance, the state industries have been able to operate because the Justice Department’s Drug Enforcement Administration has chosen not to crack down on them. Schedule 3 substances are more loosely enforced than Schedule 1—but they are still enforced. Patients for Schedule 3 pharmaceuticals need to renew their prescriptions every six months. For the industry to comply, it would require a major overhaul of the dispensary system as it currently operates.

Under Schedule 3, it’s more likely that the state industries would be able to operate much as they currently do. But that freedom would still be at the pleasure of the feds, rather than because weed would be legal. Whether pot is Schedule 1 or Schedule 3, a state-licensed dispensary is still federally illegal, the same way an open-air fentanyl market is federally illegal. The difference is just a matter of enforcement priorities. NORML deputy director Paul Armentano, elaborating on this fear, wrote that the proposal “fails to provide states with the explicit legal authority to regulate it” the way they do with alcohol.

The Schedule 3 news has deepened fissures between the loose industry factions sometimes referred to as “Roots” and “Suits.” Very generally, those who see themselves as the custodians of the “legacy” cannabis world resent the MBA-toting “Chads” for co-opting their culture and stealing their industry. Brian “Box” Brown, a cartoonist who is critical of big weed companies, called the Schedule 3 proposal “a weak move that helps almost no one.”

In its fringier forms, the sentiment can become more conspiratorial. They don’t see Schedule 3 as a steppingstone to legalization, but as a way to permanently trap weed in its quasi-legal status, which would essentially enable the authorities to pick winners in the industry, perhaps even hand their plant over to the pharmaceutical industry. In reality, the move to less restrictive Schedule 3 is probably going to make things at least a little easier for much of the industry. But the conspiratorial view, if not accurate, is at least a bit earned, based on 85 years of cynical, cruel, and racially motivated federal pot policy.

Take the origins of the scheduling system in the Controlled Substances Act, which President Richard Nixon signed in 1970. Two years later Nixon ignored the recommendation of a federal commission, whose Republican chairman he had appointed, that smoking pot should be discouraged but decriminalized. Many years later, Nixon aide and Watergate co-conspirator John Ehrlichman told reporter Dan Baum that the war on drugs had been a pretext to undermine the administration’s perceived political opponents, specifically Black people and hippies. Twenty years later, Sen. Joe Biden sponsored the 1994 crime bill that escalated the war on drugs. (The Roots haven’t forgiven him, either.)

As legalization has spread over the last decade, the number of people in prison for nonviolent pot offenses has declined sharply, and hundreds of thousands have managed to expunge their records. But the criminalization of weed continues to sow despair. Minor long-ago offenses deprive people of rights and opportunities, such as student loans, jobs, housing, gun ownership, the vote, and more. While white and Black Americans use cannabis at similar rates, Black people are several times more likely to be arrested. Though way down from the peak of about 800,000 instances in 2008, as of 2021 weed remained, by far, the drug most commonly confiscated by law enforcement.

Now Biden, though still among the more conservative Democrats on the issue, has positioned himself to quietly benefit from liberalizing pot policy. Sadly, he’s unlikely to appear in character as the Onion’s 420-friendly “Diamond Joe” character. But he’ll own the popular bipartisan issue in his 2024 reelection campaign against Donald Trump or any other Republican opponent.

Politicians have learned there’s little to gain from standing between the people and their weed. In 2020, Biden arguably won Arizona because weed was on the ballot. Republicans in Washington are generally less enthused and have learned to keep their distaste in check, but 55 percent of GOP-leaning voters now favor legalization. No wonder the Biden administration seems to be gravitating toward the “Goldilocks” option. Not too restrictive for voters. Not too permissive, either.