DEA signs off on marijuana rescheduling, but process not done yet

(This story was updated at 7:08 p.m. ET with more details and comments.)

Tuesday’s revelation that the U.S. Drug Enforcement Administration will loosen federal restrictions on marijuana has major implications for the American cannabis industry.

However, the DEA’s concurrence with health regulators’ findings that the drug has medical value was just the latest hurdle marijuana rescheduling has cleared since October 2022, when the Biden administration ordered cabinet-level agencies to “expeditiously” review federal marijuana law.

And a few more steps remain in the federal rulemaking process before cannabis businesses can enjoy tax savings – and other benefits of rescheduling.

Those steps could take months, according to observers, who nevertheless emphasized the importance of this most recent development.

“It’s a profound step on the path to legalization,” said Adam Goers, senior vice president for corporate affairs at New York-based marijuana multistate operator The Cannabist Co.

“It doesn’t get us to where we all know where we want to go – fully ending federal prohibition on cannabis – but it starts us getting there.”

Marijuana is medicine

Citing five anonymous sources, the Associated Press on Tuesday reported that the DEA will recommend to the White House Office of Management and Budget (OMB) that marijuana be moved to Schedule 3 of the Controlled Substances Act from Schedule 1.

Schedule 3 drugs have accepted medical value but are available legally only with a prescription.

That would mean marijuana, which is widely available in the United States as a recreational drug and is not approved by the U.S. Food and Drug Administration, would be an outlier in that classification.

It also would mean that the U.S. marijuana industry as it exists today would remain federally illegal.

However, once a move to Schedule 3 were finalized, retailers would be able to realize significant tax savings by bypassing Internal Revenue Code Section 280E – which prohibits sellers of Schedule 1 and 2 drugs from taking certain business deductions on their federal tax returns – would no longer apply.

Steps to rescheduling

Attorney General Merrick Garland was expected to make the rescheduling recommendation to the White House sometime Tuesday, The New York Times reported.

After the White House reviews the proposal, rescheduling goes back to the Justice Department, which will publish a proposed rule in the Federal Register.

A public-comment period will follow, along with hearings in front of an administrative law judge, before the rule can become law.

The process will almost certainly draw lawsuits, and it’s still not clear how long the process will take.

The OMB could sit with the decision for as long as three months, and the comment period could also take months.

“I would think they’ll try to move faster, but we’ll see,” said Shane Pennington, an appellate attorney and partner at Washington, D.C.-based law firm Porter Wright.

What rescheduling doesn’t do

Rescheduling has next to no impact on state-regulated marijuana markets, all of which have been launched with cannabis as a Schedule 1 drug.

Federal and state law will continue to conflict with one another.

Exactly how rescheduling would unlock federally funded research is unclear, as skeptics worry the Medical Marijuana and Cannabidiol Research Expansion Act might leave current restrictions in place.

Shares in publicly traded cannabis companies gained after the news broke Tuesday, suggesting investor confidence might be boosted – a welcome development in what’s been a yearslong bear market in some states – but practical day-to-day realities for operators will remain the same.

Interstate commerce is still illegal, and cannabis businesses still might face the same difficulties seeking loans, investment, bankruptcy protections and even bank accounts.

“This is a positive step forward for federal cannabis policy, however it is a rather modest step given the strong support among American voters for comprehensive cannabis reform,” Matthew Schweich, executive director of the Washington, D.C.-based Marijuana Policy Project, a leading legalization advocacy group, said in a statement.

Political impact of rescheduling

Concrete action from the executive branch is likely to pile pressure on Congress to finally act on long-stymied marijuana reform.

In addition to the SAFER Banking Act that would protect banks doing business with marijuana companies from federal regulators, there have been recent proposals in Congress to allow plant-touching companies to list on U.S.-based stock exchanges.

All of these measures have failed, creating a heretofore insurmountable obstacle for more ambitious reform such as removing marijuana from the Controlled Substances Act entirely.

But rescheduling is a “huge shift in policy and signal to the American people that the days of reefer madness are coming to an end,” U.S. Sen. Ron Wyden of Oregon said in a statement.

“Cannabis should ultimately be descheduled with strong federal regulations put in place to protect public health and safety,” added Wyden, who is co-writing a marijuana legalization bill with Majority Leader Chuck Schumer that has yet to be introduced.

Passage in the Senate, where 60 votes are needed to defeat the filibuster and pass major legislation, is far from assured.

A sea change in American drug laws likely would please the nearly nine out of 10 Americans who believe marijuana should be legal in some form, according to Pew Research.

Marijuana reform also is broadly popular with younger voters – including those dissatisfied with the Biden administration’s handling of Israel’s war in Gaza.

And with adult-use legalization on the November ballot in Florida – the home state of former President Donald Trump, Biden’s assumed opponent as the presumptive Republican nominee for president – there’s a growing feeling that marijuana reform could play some role in presidential politics.

“I could not be more excited that we are finally in the home stretch to end the failed war on drugs,” said U.S. Rep. Earl Blumenauer, an Oregon Democrat and co-chair of the Congressional Cannabis Caucus.

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.