“Unless Congress acts, the Biden administration’s plan to merely reschedule marijuana is likely to supercharge the rise of national cannabis conglomerates while strangling local community-scale businesses.”
By Bruce Barcott and Shaleen Title
The SAFE(R) Banking Act vote and the Biden administration’s review of the federal status of marijuana have garnered headlines and applause from many drug reform advocates and cannabis industry leaders. But without congressional action to protect small businesses, federal marijuana reform threatens to give an unfair advantage to a handful of national corporations while hobbling thousands of local farmers and neighborhood shopkeepers.
Under current law, state-licensed marijuana companies are denied the use of basic financial services. That means no checking accounts, no tax credits, no small business loans. For the cannabis industry’s emerging billion-dollar corporations, that’s not a problem. They’re able to expand and gobble up smaller companies (and their licenses) using private equity money and funding rounds in the hundreds of millions of dollars.
Small businesses can’t compete on that scale. Unless Congress acts, the Biden administration’s plan to merely reschedule marijuana is likely to supercharge the rise of national cannabis conglomerates while strangling local community-scale businesses.
This should be a bipartisan win-win. Support for small business and marijuana legalization are two rare issues where Republican and Democratic voters find common ground. A recent Gallup poll found Republican support for legalization now tops 51 percent, while 81 percent of Democrats want to end pot prohibition. Both parties compete to be seen as the one true BFF of Main Street mom-and-pops.
And yet party leaders on both sides are poised to embrace a lose-lose. In a study recently published by Ohio State University’s Drug Enforcement and Policy Center, we found that America’s $26 billion legal cannabis industry is quickly consolidating into the hands of a few well-financed national players. In 2018, the seven largest multistate cannabis companies accounted for only 3 percent of the legal industry’s annual revenue. By the end of 2022, that share had grown to nearly 18 percent.
If the trend continues, the cannabis industry might soon resemble America’s beer industry: a market dominated by a handful of global corporations with small businesses competing for an ever-shrinking slice of the pie.
Here’s how that could happen. Last year President Biden launched a review of marijuana’s status as a Schedule I drug. Late last month, the Department of Health and Human Services (HHS) reportedly recommended that marijuana be reclassified as a lower-risk Schedule III substance (alongside steroids, ketamine and Tylenol with codeine), instead of the nonsensical Schedule I status (heroin, LSD) it was shoehorned into by the hippie-hating Nixon administration.
If the Drug Enforcement Administration agrees with HHS, a down-scheduling would compel the Internal Revenue Service to stop treating legal state-licensed companies like Miami Vice-era cocaine smugglers. That’s no small thing. Congress created the federal tax code’s Section 280E in the early 1980s specifically to penalize companies selling substances listed as Schedule I or II. As a result today’s state-licensed cannabis companies are effectively taxed at rates ranging from 60 percent to 90 percent.
Although moving marijuana to Schedule III would offer tax fairness to all legal operators, it wouldn’t change their status as federal criminals. Basic banking services would remain forbidden to them. And for the first time, it would create a new path to federally legal, FDA-approved status—a path that only major pharmaceutical companies can likely afford.
In every other industry, small businesses utilize a portfolio of programs to help them compete in a robust marketplace. The engine that drives America’s economy is the government-backed small business loan. These financial instruments, partially guaranteed by the federal Small Business Administration (SBA) and secured by local banks, turn promising business plans into thriving, wage-paying operations. They allow prosperous companies to expand. When disaster strikes, they help businesses recover.
SBA loans are available to all American entrepreneurs—except those running state-legal cannabis companies. Even with Schedule III status, banks would risk running afoul of anti-money laundering statutes. SBA officials would remain bound by marijuana’s still-technically-illegal federal status.
Congress and the White House don’t need to reinvent the wheel. There are simple solutions available. Small businesses could be allowed to engage in interstate commerce now, before Amazon and Philip Morris get into the industry. They could be allowed access to grants and loans. Even SAFER, a modest banking reform measure, could give America’s state-licensed, tax-paying and law-abiding small cannabis companies a fair shot at success if it was amended to allow for SBA loans.
America’s 33 million small businesses deserve the chance to compete and prosper. Our communities are stronger when local entrepreneurs thrive amid their national competitors—in every industry.
Bruce Barcott is the author of Weed the People: The Future of Legal Marijuana in America. Shaleen Title, a former member of the Massachusetts Cannabis Control Commission, is founder and director of Parabola Center for Law and Policy.
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