A bill to legalize cannabis at the federal level passed in the U.S. House late last year. Now, legislation backed by Oregon Sen. Ron Wyden and Senate Majority Leader Chuck Schumer is making big waves. Though widely believed to be unlikely to draw the 60 votes needed in the Senate to pass, those closest to the industry say it’s significant. Public opinion polling suggests support for legalization is close to 70%. The legislation would decriminalize use, allow for research, expunge marijuana convictions and fund restorative justice programs. Alex Tinker is a lawyer and the co-chair of the Cannabis Industry Practice Group. He joins us to talk through what legalization would mean for the U.S. economy, and specifically how it would grow Oregon’s cannabis business and the larger state economy.
This transcript was created by a computer and edited by a volunteer.
Dave Miller: From the Gert Boyle studio at OPB, this is Think Out Loud, I’m Dave Miller.
Adults can now buy recreational marijuana in 18 states, and can use medical marijuana in 37. But as far as the federal government is concerned, it is still an illegal drug. In fact, it’s a Schedule One drug, the same category as heroin and methamphetamine. Last week, three Democratic US Senators, including Oregon’s senior senator Ron Wyden, released a draft of a bill to change that. It’s called the Cannabis Administration and Opportunity Act. It would decriminalize cannabis at the federal level, give the FDA authority to regulate its sale, and fund efforts to address equity issues after almost a century of prohibition.
For more on what the bill would do and what its passage might mean for Oregon, I’m joined by Alex Tinker. He is a lawyer who represents clients involved in the cannabis industry for the law firm, Tonkon Torp. It’s good to have you back on the show.
Alex Tinker: Thanks for having me, Dave.
Miller: I mentioned the number of states where recreational or medical marijuana is now state legal. What does the national picture look like to you at this point, in terms of cannabis?
Tinker: I’d say that for quite a while, many have viewed an end to federal prohibition of cannabis as inevitable. And while the introduction to this bill is, on the one hand, a historic watershed moment (when you want to change federal law, there’s nothing quite like the support and even leadership from the top federal law maker,) but on the other hand, this is just another incremental step forward in a decades old movement to end the war on drugs, at least with respect to cannabis. To me, the most interesting part of this news isn’t the Senate leader supporting an end of prohibition, but that the proposal includes measures to mitigate some of the harm that prohibition has done, which of course has fallen disproportionately on people of color, and the poor.
Miller: Let’s dig into that as we go, but I want to start with removing from Schedule One, what that would mean? What does that listing mean currently for the states’ legal cannabis industry?
Tinker: Well, there’s two answers to that question. In a strict legal sense, that means that the entirety of every state’s legal cannabis industry is still considered drug trafficking, and violating every federal law that is tied to that. Schedule One is the highest schedule, there’s no legitimate use.
On the other hand, in practical sense for quite a while now, the federal government has been standing down, and standing down even officially to an extent with respect to state medical regulation, as for some time, the Department of Justice has been prohibited from spending its funds to interfere with state implementation of their medical cannabis programs.
Miller: But practically speaking, there still are federal laws that are enforced, or that prevent cannabis companies and companies involved in various aspects of the cannabis industry to actually do business like other companies. So what are they prohibited from doing?
Tinker: The one thing that this did is, it’s removed the risk of being locked up and going to jail, and given the cannabis businesses access to the courts to resolve disputes. But other than that, they don’t have many of the federal protections and tools that we think of and take for granted that are fundamental to businesses. They don’t have access to banks or that access is very limited. You can’t get the same kind of intellectual property protection under federal law, which is exceedingly important. And there’s this tax treatment for cannabis businesses, that essentially means you can very easily have taxable income while having an actual loss, based on the prohibition on deducting ordinary business expenses.
So while the federal stand down on criminal enforcement has allowed the industry to get up and running, it’s still been a very uphill climb, because these businesses have to be much more profitable than any other business that is allowed to deduct its business expenses. They’ve got to deal with the transaction costs of still dealing to a large extent in cash, or paying much higher banking fees. And they’ve got to get very creative in the way they protect their brands, protect their technologies, and so forth.
Miller: Or protect their piles of cash, which they are more likely to have because they can’t bank.
Tinker: Right. One of the arguments for regulation is we want to remove the things that can cause externalities, susceptibility to violence, to other crimes that everybody agrees are bad. But we haven’t actually solved that problem. As anyone in the Portland area who paid attention to cannabis knows there, for a while, has been a scourge of robberies of dispensaries. There have been some major theft at warehouses. And part of that is that you do have literally still piles of cash that have to be protected.
Miller: What would this mean for marijuana growers in Oregon? Let’s say that this were to pass, and maybe not all 50 states, but in more states, cannabis were legal. What would that mean for growers in Oregon or Northern California?
Tinker: It would be huge, Dave. Oregon, Southern Oregon especially, and Northern California, have some of the most productive land for growing cannabis in the world. And it’s got a long established industry, during the unregulated days of the market. It didn’t get that by producing cannabis for people in Oregon and California alone. Oregon especially, we have 4 million people here. That Oregon legacy industry exists because of exporting its product. To some extent, for part of that industry that decided to go get licensed in Oregon here, it’s been devastating to some producers. The first year that Oregon had a large number of outdoor licenses issued, the prices dropped severely. And a lot of people went out of business. That’s why there’s been a push among Oregon growers to provide for some structure for interstate trade in cannabis, even if it comes maybe before there’s full federal legalization. A couple of years back, Governor Brown even signed a bill providing for that to be permitted, if and when there’s a nod from the federal government.
But it’s not just a good thing for Oregon here. Right now, there is infrastructure being built out all over the country to produce indoor cannabis, which is, compared to growing it under the sun, exceedingly expensive, has a much higher environmental impact, and basically is just not very efficient. Any other products that we consume is produced in the place where the cost of production is lowest. And when you do that, you have lower prices for consumers, you have more surplus created, and just a better market and economy. So, one of the big obstacles to the US market developing is that product is stuck within the state that it’s produced in. And so opening up interstate trade would be not just good for Oregon producers, but also for the people in other states who can then buy that product, which may cost half as much or even more compared to what can be produced in a warehouse in New York, for instance.
Miller: I should point out that this would remove the federal prohibition on cannabis, but it would not preempt state level regulation. So if this were to pass, would you expect new anti-cannabis laws in some of our country’s more conservative states?
Tinker: We don’t need new anti-cannabis laws in the country’s more conservative states, they’re already on the books. What I do wonder is whether there are places that have not chosen to decriminalize or to move forward because of federal prohibition, and that might do so if we do have a change in federal policy. At this point, most states have decided to at least allow for CBD, or to decriminalize or to have medical programs. Many have adult use programs as well. And that progress continues. Big question for me is, are there states, and are there voters and legislators who would be more willing to change state law if federal law was not in conflict with the changes?
Miller: As you mentioned at the beginning, the end of federal prohibition is just one piece of this proposed bill, which is now 163 pages. There’s a lot more to it. Can you give us a sense for some of its other current provisions?
Tinker: I’ll note that even the senators introducing it have noted this is a “start the discussion” kind of bill. What it might look like if and when it actually gets a vote can change a lot. But some of the critical features are: providing an opportunity for people who are still serving federal sentences for cannabis crimes to get a hearing, to look at their sentence, to maybe get it reduced, to maybe get out of jail. And also proactive measures to provide access to capital and opportunity for the kinds of people who have been on the bad end of prohibition, meaning to support entrepreneurs from less represented communities, people of color and so forth.
You’ve seen that happening to a certain extent in various state programs, but usually as, at least with the early states, a second wave of reform, not as part of the package out of the gate. And to me, the most interesting part of this bill is not that the Senate Leader dropped a bill to end prohibition, but that we’re starting the conversation right now, with doing those things that are necessary, not just to stop doing bad moving forward, but to try to rectify some of the wrongs of the past.
Miller: Is it also possible though that politically, putting those in this decriminalization bill could make it a bigger lift?
Tinker: Absolutely. And you’ve actually seen some measures fail in states, in part, because of controversy over that. The thing to note here though, and part of why I say I don’t see this as the watershed moment, is that we’re talking about a bill in the Senate where you need 60 votes to pass, and the 40 senators, 41 senators who can block that, represent a small minority of the country. So I think starting the conversation there is a good move, because we need to have that on the table now, and that’s not going to be what makes a difference in terms of whether the Senate passes a bill this year or not. I would be pleased and very surprised if we end federal prohibition in the session of Congress. And so I think starting with everything on the table is the right strategy.
Miller: Right now, localities in Oregon, say cities, for example, they can charge taxes of up to 10% on cannabis sales, state taxes are 17%. Under this potential federal bill, the federal government after a couple of years would then levy its own federal taxes of 25%. At what point, when you add all these together, do you increase the likelihood of a thriving black market for untaxed marijuana, even within states where cannabis is currently legal, just because there wouldn’t be, when you add it all up, close to a 50% tax on the drug?
Tinker: It’s a really important point. I do think there’s one important caveat to the idea that this would impose a federal tax on cannabis for the first time. While it’s not regulated at the federal level, and there isn’t an X percent tax on sales, because of this IRS Provision 280E that allows ordinary business expense deductions, in effect, cannabis businesses are paying a whole lot of extra federal income tax for their business. So, the federal government, they might not want to admit it, but they are already making a lot of money from the state cannabis industry.
The question of taxation, there been some research done in Oregon because this question came up too, thinking about the elasticity of demand and so forth, and how do you get that transition? I think one important feature is that what regulation does is reduce the risk for everyone, whether you get a license or not. But that’s not true unless law enforcement continues to actually enforce the law against those who are operating unlicensed. And I know a lot of businesses, at least in the Oregon industry, have been disappointed to see that literally, in some cases, especially down in Southern Oregon, you’ll have an OLCC licensed farm with an unlicensed farm next door. There’s been pretty minimal enforcement there, and I think that’s the key to ensure that the illicit market all transitions to the regulated market, and that you can do that while also having meaningful taxation on the product.
Miller: Taxation is one side, regulation is the other. They sort of go together. Under this bill, the FDA would regulate the manufacturer and marketing of cannabis products, including product standards, labeling information, and directions for use. Where would that leave, in Oregon, the OLCC-run system that took a number of years to be up and running, which already regulates all of these things?
Tinker: I would say that having some normalization around some of these regulations would be to great benefit, and I would expect that the FDA would look to what the states have done, who’ve been thinking closely about this for many years now, in terms of how you regulate these products.
The burgeoning CBD product industry is an interesting example here, where there are really no standards, but you can go buy a CBD edible product at half the gas stations and supermarkets in the country now. Presumably, this would be preemptive, such that state regulations had to be at least at tight as federal regulations, but when you’re gonna have an interstate market, I think that makes sense, and entities that are gonna be selling products in multiple states probably want to have one set of standards that they can comply with.
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