Sept. 1 marked the deadline for public comment on the preliminary draft of the Cannabis Administration and Opportunity Act (CAOA) and industry stakeholders made sure their voices were heard.
“You’re seeing a lot of comments, which is good, trying to protect people on both sides of interests,” Adam Fayne, partner and co-chair of the cannabis practice at Saul Ewing Arnstein & Lehr, told Cannabis Business Times and Cannabis Dispensary. “I think everyone is behind social reformation and all the causes around expungement and decriminalization and so forth. I don’t think there’s any issue with that. I think people just have different ideas on the best path to get there.”
The U.S. Cannabis Council (USCC) and the Marijuana Policy Project (MPP) submitted similar feedback on the draft legislation, which would remove cannabis from the Controlled Substances Act, tax and regulate cannabis at the federal level, and allow states to keep or administer their own oversight programs.
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“Certainly, what’s working well overall is that we have, for the first time, a comprehensive cannabis reform bill introduced in Congress that tackles the hard part, which is the regulatory structure and everything else that comes with the industry,” USCC CEO Steve Hawkins said. “That is really the good news and it’s encouraging that [Senate Majority Leader Chuck] Schumer put this bill out.”
“We support ending federal prohibition as soon as possible,” added MPP State Policies Director Karen O’Keefe. “We’re enthusiastic that [the CAOA] includes re-sentencing [and] expungement, that it completely legalizes up to 10 pounds of cannabis under federal law, … and that it has some community reinvestment. But there are a number of things that we think are important to change before it’s enacted.”
In MPP’s formal comments, as well as those submitted by USCC, both organizations are critical of certain aspects of the legislation. This includes the bill’s tax structure, how federal legalization might affect state-legal cannabis programs and the decision to let the Food and Drug Administration (FDA) regulate the industry.
Tax Structure
The CAOA draft bill levies a tax on cannabis products that increases from 10% to 25% within the first five years of legalization.
USCC and MPP agree that this tax is too high, especially when added on top of existing state and local taxes.
“That model, it’s not taking into account some of the complexities of cannabis and how the industry runs and operates,” Hawkins said. “Under the current taxation structure, we feel it would actually make matters worse because it would be fueling the illicit market. Some states, for example, already have a 25% cumulative tax.”
Fayne echoed these concerns.
“If [federal legalization] drives the price up too much, then you’re still going to have the unintended consequence of the illicit market,” he said. “If you truly want to get rid of the illicit market, you have to make cannabis available to everybody by way of access as well as the price.”
Since the federal government will undoubtedly require its fair share of taxes to cover the cost of regulation and restorative justice initiatives, Fayne said federal legalization could ultimately drive state taxes down to keep costs in check.
Federal-State Tension
While federal legalization will remove some of the industry’s biggest challenges, such as restricted access to banking and tax code Section 280E, Fayne said interstate commerce could quickly become the industry’s greatest obstacle if it is not addressed correctly in the CAOA.
“You can’t really stop interstate commerce necessarily, but you want to do it in a way where the people that have invested all this time and capital into the industry … don’t get crushed by this bill,” he said, adding that small business owners and social equity licensees could be especially impacted by an influx of national competition.
“You have social equity applicants who finally got a license—the state of Illinois is doing the right thing by trying to redistribute the economics of these licenses—and the social equity awardees are going to go out and invest [millions of dollars] in these grow facilities in Illinois, but what are they going to do if all of a sudden, you have some huge operator rolling into the desert of New Mexico?” Fayne said. “The labor may be inexpensive compared to Chicago, and now they’re going to be allowed to sell it to Chicago. They’re going to crush these social equity awardees. So, I think with this bill, you’re trying to find some balance between protecting the pioneers that have created this social reform versus the result that there’s going to be interstate commerce one day.”
In its current form, the CAOA does not identify which aspects of cannabis regulation will be left to the states and which aspects will be assigned to the federal government, Fayne added, meaning that it is unclear which regulator will oversee cannabis testing and packaging requirements, for example.
USCC and MPP argue in their comments on the CAOA that there must be a transition period for state-legal cannabis businesses to comply with federal regulations before the launch of interstate commerce to give all businesses a chance to succeed.
“There has to be … an opportunity for companies large and small, particularly multistate businesses and others, to be able to transition before we start the actual marketplace,” Hawkins said.
Otherwise, O’Keefe fears that many businesses—especially start-ups—may not be able to make the jump from intrastate to interstate commerce.
O’Keefe suggested that the CAOA should allow states to choose whether to allow interstate commerce, so perhaps states could take time to tweak their existing laws, tax structures and licensing systems before allowing out-of-state competition.
“In general, the regulations should be mindful that these states have developed systems for 10-plus years and those should be respected,” she said. “Having some areas of federal harmonization, such as lab testing, prohibited pesticides [and] labeling … makes sense, but it should be a slow transition and allow plenty of time. … We just want to make sure that, in the legislation, it is extremely explicit and written in a way that doesn’t have that kind of sudden transition, that actually allows ramp-up time for any change to rules and recognizes that these are already regulated on the state level and gives plenty of time for input, so we don’t end up accidentally making the system have a relatively small handful of large businesses.”
The FDA’s Role
USCC and MPP are skeptical of the bill naming the FDA as the cannabis industry’s primary regulator, instead calling for the Tax and Trade Bureau at the Treasury Department to oversee the market.
“The FDA has certainly a role, but the Tax and Trade Bureau would be a better fit,” Hawkins said. “It plays that role with respect to alcohol and tobacco, and we feel it would be the space to have primary jurisdiction. We understand that the FDA would still have a role with any kind of specific medical use of cannabis, as well as food additives.”
MPP also believes that the Tax and Trade Bureau should regulate the cannabis industry at the federal level, particularly because compliance could get costly under the FDA.
“FDA would have very expensive, hard requirements [and] only those with extremely deep pockets would be able to jump through the hoops, and that would favor large businesses at the expense of small ones,” O’Keefe said. “And that would also greatly reduce the amount and types of products available. We want to see the same regulators that regulate alcohol be the primary agency and have involvement from the FDA be limited and not include that pre-market approval on products.”
What Comes Next
Now that the Sept. 1 deadline for public comment has passed, the CAOA’s sponsors have received feedback from across the industry that will inform their next steps and ultimately result in the filing of an actual bill.
Fayne said that while lawmakers are not required to tweak the legislation based on the feedback they received, he would be surprised if the bill doesn’t get updated.
While an exact timeline is unclear, Hawkins anticipates seeing formal legislation by the end of the year, and the USCC will continue speaking with members of Congress as they fine-tune the bill, he said.
Once a formal bill is filed, it will first go to committee before the possibility of receiving a full floor vote in either chamber of Congress.
Fayne is unsure if the legislation has the support it needs.
“You would need every Democratic senator on board, plus another 10 Republicans, … and people really don’t think the votes are there at this time,” he said about avoiding a possible filibuster. “I think Schumer is going to do everything possible to get behind the bill and try to push through.”
O’Keefe, on the other hand, is optimistic about the CAOA’s future in Congress, especially as public support for legalization increases and more states implement regulated cannabis programs.
“We are really enthusiastic to see the Senate majority leader put out a federal plan for legalization and we’re glad there’s this process because it is a complicated issue with all these systems of state regulation,” she said. “We need to make sure this is done in a way that promotes freedom of cannabis and preserves small business instead of destroying it. … We’re encouraged by what’s being put forth, and we hope that it’s acted on soon.”
Even if the bill ultimately stalls, Fayne said the industry should still be encouraged by the active discussion happening in Washington surrounding cannabis policy reform.
“When cannabis is a part of the national voice, a part of the national discussion, it’s always a good thing,” he said. “And this bill, whether it succeeds or doesn’t, keeps cannabis relevant at the national level, which is always good for the industry. Obviously, we’re all hopeful that there’s big reform like this bill that’s being proposed, but if it has to be incremental, if it has to be banking as a first step, then so be it. But everyone is hopeful.”
And whether it comes through the CAOA or another piece of legislation, federal cannabis legalization will impact the day-to-day operations of every state-legal cannabis business in the country. So, what can these businesses do now to prepare for the shift in federal policy?
“I think the most important thing is for businesses to make sure that their voices are heard,” Hawkins said. “Be in contact with … congressional representatives, be in contact with … law offices because … this is a time when sitting by is not an option."
