Cannabis Freedom Alliance Launches, Aims to Spur Federal Legalization of Marijuana

This week, four free-market-oriented nonprofits joined forces to launch a new advocacy organization that will help to inform the debate on the federal legalization of cannabis.  The Reason Foundation, Americans for Prosperity, Mission Green (The Weldon Project) and the Global Alliance for Cannabis Commerce are the founding members of this new organization, the Cannabis Freedom Alliance.

The Cannabis Freedom Alliance’s (CFA) mission statement states,

The Cannabis Freedom Alliance (CFA) seeks to end the prohibition and criminalization of cannabis in the United States in a manner consistent with helping all Americans achieve their full potential and limiting the number of barriers that inhibit innovation and entrepreneurship in a free and open market.

The CFA has coalesced around four founding principles of marijuana legalization:

1. De-scheduling of cannabis under the federal Controlled Substances Act and the facilitation of an orderly, legal market for cannabis;
2. Expungement of existing federal cannabis convictions and encouragement of individuals to successfully re-enter the workforce;
3. Promoting entrepreneurship on a free and open market for legal cannabis; and
4. Pursuing a tax regime that allows legal cannabis to compete with and ultimately eliminate the illicit market.

To be sure, there are many subcomponents of any major federal policy change on cannabis, and the CFA seeks to advise federal policymakers and other stakeholders on the mechanics of legalization.  This includes any federal regulatory effort to govern legal cannabis markets within the states that may emerge.

Following the passage of marijuana legalization statutes in New Mexico, New York and Virginia this year, the number of states with laws permitting recreational use of marijuana by adults has now grown to 18 (although a legal dispute is pending regarding implementation of the ballot initiative passed last November in South Dakota).  Each of these states has, or is establishing, its own regulatory systems to monitor all licensed inventory of cannabis from seed to sale, facilitate transfers between licensees, and provide for testing and labeling procedures, among other provisions. The Cannabis Freedom Alliance believes these state regulatory systems are working largely as intended and such oversite should not be duplicated at the federal level.

Nonetheless, a federal agency will likely need to regulate commerce between the states in the event federal declassification permits interstate trade of legal cannabis products.  A majority of states maintain cannabis as a restricted substance under their own state versions of the Controlled Substances Act and this will likely remain the case for several states far into the future.  Federal regulators should focus their energy on monitoring the regulatory activities of states that have created legal cannabis markets and coordinating the transfer of inventory between different state regulatory regimes in the event states begin to accept interstate transfers of this inventory.

Similarly, state lawmakers and regulators will need to establish parameters for accepting any interstate transfers of inventory, including the testing, labeling and packaging requirements to which out-of-state suppliers should adhere.  When the federal prohibition on alcohol was rescinded nearly a century ago, the bulk of regulatory activity still occurred at the state level and this approach should be carried over to cannabis as well, allowing each state the ability to determine its own market structure.

The CFA advocates that any federal action should also address the punitive tax treatment of legal cannabis companies by removing cannabis from the strictures of Internal Revenue Code Section 280E.  That section disallows cannabis companies from deduction of “ordinary and necessary” business expenses such as employee payroll, rents, utilities, accounting and legal fees, and similar expenses.  Instead, 280E allows cannabis companies to deduct only the direct costs they pay for acquiring inventory and results in a tax on each company’s gross margin rather than its net income.  As a result, cannabis companies can face significant liabilities on federal income taxes even in years in which they operate in the red.  In fact, 280E treatment can turn a profitable company into one that loses money because federal income tax is based more on gross receipts than net income.

Some advocates have called for a federal excise tax on legal cannabis to offset the costs of federal regulation. If such an excise tax is created, policymakers should be mindful that legal cannabis competes directly with nearly identical products on the black market.  Research shows that most marijuana consumers are sensitive to even small changes in the price of legal cannabis and have a propensity to revert to black-market substitutes if the price disparity between similar products ranges too high.

States and localities already levy significant excise taxes on legal cannabis.  If the combined burden of federal, state and local marijuana taxes threatens the price competitiveness of legal markets, then black-market supply channels will persist—undermining a major objective of legalization.  The Cannabis Freedom Alliance cautions policymakers against this danger but recognizes a modest federal excise tax could still result in a net tax cut for cannabis companies if Section 280E is removed or relaxed.

Finally, the legal cannabis market, like all other markets, should offer economic opportunities for aspiring workers and entrepreneurs across the nation.  Those with past marijuana convictions are often most knowledgeable about the industry and should not be routinely excluded from participating in the industry.  Similarly, the entry and exit of firms should not be unduly restricted so that people can compete on a free and open marketplace.

After nearly a century of failed federal policies that have wrongly criminalized millions of peaceful Americans while allowing violent international cartels to supply the demand for cannabis, it appears Congress is now on the verge of righting those wrongs.  The CFA applauds and supports that overall sentiment and looks forward to advocating for marijuana policy that promotes individual liberty, justice, entrepreneurship and competition.