Locke Lord QuickStudy: Seeing Through the Haze Part II: What will federal legalization of marijuana look like?

Locke Lord LLP
April 19, 2019

This is our second of three articles examining various proposals for the federal legalization of marijuana and the possible socioeconomic impact those proposals could have on the burgeoning marijuana industry. Part I of our series looked at the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. This article reviews a second proposal, the so-called “420 Bills” pending in the United States Senate. The third article in our series will examine the CAREERS Act and the Marijuana Justice Act.

The 420 Bills

Senator Ron Wyden of Oregon has proposed bill numbers 420 (the Marijuana Revenue and Regulation Act), 421 (the Responsibly Addressing the Marijuana Policy Gap Act), and 422 (the Small Business Tax Equity Act of 2019) in the United States Senate. Representative Earl Blumenauer has proposed a bill similar to Bill 420 in the U.S. House of Representatives.

What the 420 Bills would do

The 420 Bills are ambitious in their scope. Bill 420 would: (1) deschedule marijuana from the Controlled Substances Act (CSA); (2) establish an escalating federal excise tax of up to 25% on marijuana products; (3) establish an occupational tax for producers of marijuana; (4) create a federal permitting system for marijuana-related businesses (MRBs); (5) provide for packaging and labeling guidelines for marijuana products; (6) apply restrictions on marijuana advertising similar to those imposed on alcohol advertising; and (7) transfer jurisdiction over marijuana from the Drug Enforcement Administration to the re-designated Bureau of Alcohol, Tobacco, Marijuana, Firearms and Explosives.

Bill 421 contains a number of significant provisions as well, including: (1) exempting from the CSA any state-legal marijuana activity; (2) allowing MRBs to access financial services, bankruptcy protections, and marijuana research; (3) expunging federal marijuana-related criminal records; (4) protecting immigrants from deportation based on marijuana-related violations; (5) authorizing doctors from the Department of Veterans Affairs to prescribe marijuana; and (6) protecting Native American tribes from federal marijuana prosecution.

Bill 422 would address a key tax issue by exempting MRBs from 26 U.S.C. § 280(e), which prohibits an entity from taking a business expense deduction if the business consists of trafficking in controlled substances. This effectively prevents MRBs from taking the business expense deduction relied on by businesses throughout the country and places a significantly higher tax burden on MRBs.

The 420 Bills would certainly need to be refined before enactment. For instance, if Bill 420 deschedules marijuana from the CSA, then Bill 421’s exemption from the CSA for state-legal marijuana activity would appear superfluous. But the gist of the 420 Bills is to legalize marijuana and start regulating it at the federal level like alcohol and tobacco. As Senator Wyden argues “[t]he federal prohibition of marijuana is wrong, plain and simple. Too many lives have been wasted, and too many economic opportunities have been missed.”

What the 420 Bills would not do

There is one interesting thing that the 420 Bills would not do—allow for transportation of marijuana across state lines if state law prohibits such transportation. Section 202 of Bill 420 would deschedule marijuana from the CSA, but it would continue to

be unlawful to ship or transport marihuana from any place outside a State, territory, or district of the United States, or other place noncontiguous to but subject to the jurisdiction of the United States, into that State, territory, or district of the United States, or place, when such marihuana is intended by any person interested therein to be received, possessed, sold, or in any manner used, in violation of any law of such State, territory, district, or place.

This will allow individual states to prohibit the importation of marijuana into their states from other states if they so choose. In practice, this will give states significant flexibility. Some states may use that flexibility to continue to ban marijuana entirely. Other states that have already legalized marijuana at the state level will likely exercise that flexibility to protect their in-state marijuana producers and maintain their own state-specific licensure scheme.

Will the 420 Bills pass?

The 420 Bills in their current form are highly unlikely to pass. Bills 420 and 421 have no co-sponsors in the Senate. Bill 421 has three—senators Rand Paul (R-KY), Michael Bennett (D-CO), and Patty Murray (D-WA). It does not appear there is a strong appetite at present for the kind of sweeping legalization set forth in the 420 Bills.

That said, some of the individual concepts contained in the 420 Bills have a significant chance of becoming law. First, money talks. Under the STATES Act, state taxation and regulation would remain intact, allowing states to continue to generate substantial tax and licensing revenue. Elected federal officials likely want a piece of that revenue to go to the federal government. We anticipate that any federal legalization measure will include some form of excise tax imposed at the federal level, akin to that imposed on alcohol and tobacco. Second, federal legalization will likely include some form of criminal justice reform. There is a substantial voting bloc, especially in the House of Representatives, which will hold out for some process for expunging criminal records related to marijuana. We would expect that the concerns of those representatives would be resolved in any final legislation. Third, allowing MRBs to access financial services has bipartisan support. The SAFE Act, which is standalone legislation addressing that issue (and which we have written about here), continues to advance in the House of Representatives. If the SAFE Act does not succeed as standalone legislation, we anticipate it will be part of a more comprehensive bill (although if marijuana is descheduled, that will likely alleviate many of the concerns that banks and other financial institutions presently have regarding serving MRBs).

If passed, how would the 420 Bills affect the marijuana industry?

If the 420 Bills became law, the effect on the marijuana industry would be significant in some ways and uncertain in others. There would be obvious and substantive changes to the federal criminal justice system, immigration policy, advertising and labeling of marijuana products, and the ability of MRBs to access banking and other financial institutions.

The 420 Bills would also likely have a significant impact on state budgets. State-elected officials have long been promising that revenue raised from marijuana sales will be a panacea for budget woes. We believe some of the state projections are optimistic (and substantially so, see our taxation articles here and here) even in the absence of federal legalization. But passage of the 420 Bills would render those projections useless. While states will still be allowed to tax marijuana, every dollar taken by the federal government is going to be one less dollar available for the states. And if the federal excise tax reaches 25% as proposed by Senator Wyden, the promised rush of marijuana revenue for the states would likely be reduced to a trickle.

The impact on licensing and regulation of MRBs is less certain and would depend on how states respond if the 420 Bills are passed. If states continue to enforce prohibition or pass laws prohibiting the importation of out-of-state marijuana, then the state-centric licensing model in place right now will continue. That model has led to a diverse industry as opposed to a monopoly or oligopoly. If states decide that having a complex regulatory scheme is not worth the trouble (especially if the federal government has its own permitting scheme and is taking the bulk of the tax revenue) and open their doors to out-of-state competition, the marijuana industry would likely become more centralized over time. Several MRBs could come to dominate the landscape, freed from the restraints imposed by the current state-centric system. Those MRBs would either acquire potential rivals (at much cheaper prices than we are seeing currently), or put them out of business.

While several large players would likely come to dominate the industry, other MRBs would likely settle into a strong niche market, similar to the craft beer industry. The marijuana industry, with the wide variety of potential marijuana products (from edibles to hand-rolled joints to topical creams), would seem even more conducive to a thriving craft industry than the alcohol industry.

All told, the 420 Bills have the potential to transform the marijuana industry, eventually making it look a lot like the alcohol and tobacco industries. As we said with respect to the STATES Act, whether that is a good or bad thing depends on where you now sit.

Next Up

On May 2, we will evaluate the CAREERS Act, with its goal of changing the way medicinal marijuana is viewed at the federal level, and the Marijuana Justice Act, which Senator Cory Booker of New Jersey hopes to use to “reverse decades of…unfair, unjust, and failed policy by removing marijuana from the list of controlled substances” and expunging the records of those convicted of federal marijuana drug charges.