New Congressional Report Outlines Widening Gap Between State, Federal Cannabis Laws

U.S. Senators Corey Booker (D-NJ) and Chuck Schumer (D-NY)  at a July 2021 press conference on introducing legislation to end federal cannabis prohibition.
U.S. Senators Corey Booker (D-NJ) and Chuck Schumer (D-NY) at a July 2021 press conference on introducing legislation to end federal cannabis prohibition. Kevin Dietsch / Staff / Getty Images
The gap between federal and state regulations over the legal use of cannabis is widening as more and more states loosen restrictions while national policy remains stagnant.

The Congressional Research Service (CRS) recently released a 101-page report that outlines the way things stand and possible solutions the U.S. government can take to address the growing divide between state and federal marijuana regulations.

While much of the information in the report, titled “The Evolution of Marijuana as a Controlled Substance and the Federal-State Gap,” is familiar to cannabis policy watchers, the existence of the study itself can be viewed as a positive, even though the political divide hampering legalization efforts continues to grow unabated.

According to Sam Richard, executive director of the Arizona Dispensaries Association (ADA), the CRS report shows that the national conversation is trending toward more prohibitionist laws falling by the wayside, as industry leaders and agencies begin to normalize discussions around cannabis.

“I think this kind of thing is incredibly helpful,” Richard told Phoenix New Times. “For me, that is a very important signal: It's the difference between the signal and the noise. That report is the signal and everything else is noise.”

The growing divide matters. It stigmatizes legitimate businesses in states where marijuana is legal by creating unfair taxation and limiting access to banking services. It also blocks potential streams of federal tax revenue. Also, conflicting laws create confusion over what exactly is “legal” both for citizens and law enforcement. But the mere existence of the report marks another example of the momentum behind legalizing cannabis.

Piecemeal Legalization

Support for legalizing and taxing cannabis is at an all-time high. Attitudes have been shifting for decades.

Since 1969, public opinion has flipped. A 2021 Gallup poll cited in the CRS report shows that 68 percent of U.S. residents over the age of 18 favor legalization, with 32 percent opposed. In 1969, only 12 percent supported it, while more than 75 percent wanted the drug to remain illegal.

The congressional report noted that the public's concerns about legalization ran the gamut. Respondents expressed fear of increased usage among youth, increased traffic accidents caused by impaired drivers, and increased black-market activity between states with legal marijuana and those where it is still criminalized.

Proponents point to benefits such as increased tax revenues and decreases in low-level marijuana arrests that would “free up resources for other law enforcement needs.”

“The marijuana policy gap creates unique consequences for individuals who act in compliance with state law but violate federal law,” the report states. “Two of the more publicized consequences for individuals are termination of employment due to marijuana use in states that have legalized medical or recreational marijuana, and a range of implications for researchers and postsecondary students on college campuses.”

Other consequences can include problems getting certain jobs, dismissal from current employment, obtaining federal housing, and ineligibility for some visas.

In the quarter-century since California first legalized medicinal marijuana in 1996, 37 states as well as the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands, have regulated cannabis as medicine.

Since November 2012, when voter approval in Colorado and Washington made them the first states to “legalize, regulate, and tax marijuana for recreational use,” 18 states, D.C., Guam and the Northern Mariana Islands have legalized adult-use, recreational pot.

But as the federal prohibition is still the overarching law of the land, interstate commerce is banned, so each cannabis business must create its own self-contained supply chain and distribution network. This causes limited access to traditional banking services and leads to additional taxes and expenses that in many ways stigmatize the legal cannabis industry.
click to enlarge DENISE HASSE/ISTOCK
Denise Hasse/iStock

Still, cannabis tax revenues have become a juggernaut that continues to expand as more states legalize and tax the product.

According to the CRS report, citing information from the Institute on Taxation and Economic Policy, excise tax revenues on recreational sales nationwide surpassed $1 billion in 2018, and that does not include other localized taxes at various points along the supply chain. Since then, a number of states, including Arizona, have legalized recreational adult use.

Several states that have legalized, such as Vermont, do not yet have a regulatory system for production or retail in place. When that happens, it will increase the amount of taxes collected. Other states, such as South Dakota, have voter-approved legalization bills hung up in the courts as prohibitionists attempt to halt the progress of legalization.

Then there are the “hidden taxes” cannabis business owners have to deal with.

ADA's Richard pointed out a January report from Whitney Economics, a data analysis firm that specializes in the cannabis industry. Whitney highlighted policies, both explicit and implicit, that hamper business.

Whitney found that only 42 percent of 396 respondents in 20 states are turning a profit. Women and people of color are bearing the brunt of that, with 62.5 percent of female-run businesses and 67.8 percent of businesses owned by people of color not turning a profit.

The report cited limited access to banking and other financial services as the top reason for financial losses, but taxation and competition with “illicit” markets have contributed as well.

“The reality is that a lot happens between the top line of a cannabis operation and the bottom line of a cannabis operation,” Richard said. “Just because you have revenues of $1 million or $2 million a month, it does not mean that you are cashing checks for $750,000 a month. This is really, really hard work and part of the reason why it's hard is that there is what we call the ‘cannabis tax’ for everything."

Richard pointed out that, due to the perception of cannabis as a “high risk” business, commercial real estate owners can easily double the amount charged for leasing space to marijuana businesses.

Additionally, cannabis businesses have a special tax code, which does not allow them to deduct expenses that more traditional business owners take for granted.

“Despite the fact that we are a legal and regulated program in 37 states, the federal government still treats us like criminals,” he said. “There are publicly traded corporations with billion dollar market caps that have effective tax rates of 60 percent to 70 percent, while companies like GE, or [others], paid $0 in federal taxes last year.”

Cannabis Use and Enforcement

According to CRS, marijuana is the most used illicit drug in the U.S. In 2020, an estimated 32.8 million individuals over the age of 12 used marijuana in the past month.

Since 2012, as more states legalized recreational use, adult use has increased from 6.3 percent in 2008 to 12.4 percent in 2020. But use among youths aged 12-17 has fluctuated between a high of 7.4 percent in 2019 and a low of 5.9 percent in 2020.

“A 2019 review of existing research on the impact of marijuana legalization that revealed medical marijuana laws increase adult but not adolescent use is consistent with this view,” the report states.

CRS further states that several studies found that more liberalized cannabis laws have not led to an increase in youth use, but rather may be contributing to a reduction.

Legalization is also expected to lower marijuana-related arrests and expungement of records. That could lead to reduced spending for law enforcement as well as fewer low-level drug offenses in prison populations across the nation.

Focusing on trends in Washington and Colorado, the states that have the most data, CRS noted that the state of Washington has seen a 65 percent drop in possession and consumption arrests since 2012, although there was a slight uptick in 2016 and 2017 before decreasing again in 2018.

In Colorado, marijuana arrests decreased by 68 percent from 2012 to 2019, with the most common charge being possession under the age of 21.

While most federal enforcement has become focused on large-scale criminal enterprises and reining in the black market, the federal ban can also have an effect on citizens trying to clear cannabis-related arrests from their records.

According to Randal McDonald, supervising attorney at the Post-Conviction Clinic at Arizona State University's Sandra Day O'Connor College of Law, having a cannabis conviction can exacerbate punishment for other non-related charges and cause legal headaches for people in the criminal justice system.

“Folks can use marijuana now, but they have to know that it's still federally illegal,” he said. “Using it, you're still risking certain federal rights you might have, like the right to certain jobs, the right to federal benefits, housing and student loans. Just because it's legal does not mean that if you test positive in some situation, you won’t be forfeiting some right.”

As an example, McDonald referred to a case he is familiar with in which a certified medical marijuana patient was arrested for unrelated charges. Because of cannabis use, though, the patient has suffered consequences from THC showing up in his system.

Those consequences could lead to additional penalties, such as increased fines or incarceration time and trouble finding housing and employment in the future.

“You can still be punished for it in certain contexts,” McDonald said.

Possible Federal Actions

In order to address the disparity between federal and state laws, the CRS presented four recommendations for the federal government to consider:
  • Take no action and allow the gap to widen as more states legalize in some form;
  • Strictly enforce the Controlled Substances Act, thereby rendering moot efforts on a state level;
  • Reschedule or de-schedule marijuana in the CSA;
  • Take “smaller steps to address the policy gap, such as continuing to include appropriations provisions that restrict the U.S. Justice Department's ability to expend funds to enforce federal law.”

Since 2014, Congress has included an appropriations rider that prohibits the DOJ from enforcing federal marijuana bans in some circumstances. The rider must be renewed each year though, leaving DOJ enforcement to the political winds of Congress.

According to Paul Armentano, deputy director of the National Organization for the Reform of Marijuana Laws (NORML), the ban is not a fix and the only solution is to de-schedule marijuana from the CSA.

“Keep in mind that spending appropriation has to be renewed every year,” he said. “So while that is the law now, it's not something that necessarily will be the law going forward. It is up to Congress to continue to approve it.”

As to the question of de-scheduling or rescheduling — changing classification from Schedule I controlled substances to say, Schedule V, which is deemed “least potential for abuse” — removing cannabis from the CSA is the only clear way to legitimize cannabis in the U.S.

“It's a non-starter,” Armentano said. "The whole point is to eliminate this existing chasm between state laws and federal law, and rescheduling only exacerbates it.”

Historical Context

From the late-1930s until the mid-1990s, cannabis regulation was placed almost entirely in the hands of the federal government, but the dynamics changed in 1996 when California became the first state to legalize medical marijuana.

Cannabis was becoming a popular recreational drug in the early part of the 20th century, but that changed in 1937, when Henry Anslinger became the first commissioner of the newly formed Federal Bureau of Narcotics.

In testimony to Congress, Anslinger put forth arguments that pot prohibitionists continue to use to this day, referring to the “immorality and harms” of marijuana use that would “incite violent and insane behavior.” Anslinger further stated that “the major criminal in the United States is the drug addict; that of all the offenses committed against the laws of this country, the narcotic addict is the most frequent offender.”

From the implementation of the Marihuana Tax Act of 1937 that “imposed a high-cost transfer tax stamp on marijuana sales,” throughout the 1950s, cannabis was further criminalized. And in 1970, the “War on Drugs” began in earnest with the passing of the Controlled Substances Act under President Richard Nixon.

“The CSA placed the control of marijuana and other plant and chemical substances under federal jurisdiction regardless of state regulations and laws,” the CRS report states. “In designating marijuana as a Schedule I controlled substance, this legislation officially prohibited the manufacture, distribution, dispensation, and possession of marijuana except for purposes of sanctioned research.”

Under the CSA, marijuana was considered on par with heroin, LSD, methaqualone, and peyote, with a “high potential for abuse,” and “no currently accepted medical use in treatment in the United States.”

The CSA established the National Commission on Marihuana and Drug Abuse, and its name was soon changed to the Shafer Commission. It recommended the development of “social policy seeking to discourage marihuana use, while concentrating primarily on the prevention of heavy and very heavy use.” Yet it also questioned the constitutionality of criminalizing the drug, stating, “total prohibition is functionally inappropriate.”

The Shafer Commission recommended a subsequent commission to re-examine the issue, but that never happened.

ADA's Richard sees positive progress in the movement to legalize cannabis, particularly since “somebody somewhere in a damp dark room with a green visor and a desk lamp is crunching numbers about how many people are buying cannabis.”

“In 2021, cannabis sales in the U.S. eclipsed Starbucks,” he said. “These are the moments that define the future of an industry: which agencies, which think tanks, and which regulatory bodies are reporting on the boring underbelly of the industry.”

Armentano has seen the dynamics play out over and over and has learned to temper his expectations.

“I'm not a prognosticator, so you'd have to ask Chuck Schumer or Corey Booker,” he concluded.
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