Cannabis Administration and Opportunity Act: WM Policy Analysis
A discussion draft of the CAOA was first released in 2021, and more than a year and 1,800 comments later, the official bill language is finally here. At a high level, the CAOA would remove cannabis from the Controlled Substances Act, establish federal authority over cannabis regulation, implement several restorative justice provisions to help repair the harms of criminalization and support an equitable cannabis industry, and expunge some cannabis-related records.
The CAOA would end federal prohibition and allow states to decide how to regulate cannabis within their borders. Legal states would carry on without fear of federal enforcement, and prohibition states could uphold their ban on medical and adult-use cannabis if they choose. In other words, the passage of the CAOA does not translate into cannabis suddenly being legal to purchase everywhere in America.
The Cannabis Administration and Opportunity Act marks a significant moment in cannabis history. If anything, it is a benchmark of progress— a step in the right direction toward federal cannabis reform.
Next Steps for the Cannabis Administration and Opportunity Act
The biggest challenge the CAOA faces is getting enough votes- a difficult feat for any piece of legislation these days. Though the bill includes priorities from both Republicans and Democrats, it likely does not have the 60 votes needed to clear the Senate at this time. If the bill were to pass in the Senate, however, it would likely face a much easier path in the House. Just a few months ago, the lower chamber passed a similar cannabis decriminalization bill – the MORE Act – for the second time. It is unclear whether President Biden would sign the bill into law should it hit his desk, as he has not yet made any public comments on the CAOA or the MORE Act.
Though the CAOA faces an uphill battle in the Senate, it will likely now serve as a litmus test for what cannabis reforms are within the realm of possibility. Last week, Senator Schumer affirmed his commitment to getting “something done” this year on cannabis reform. Whether that means expanding medical cannabis research or passing banking reform, it is clear that Congress feels pressured to act on cannabis issues.
In summary, the Cannabis Administration and Opportunity Act is a federal decriminalization bill that includes several essential restorative justice measures, such as automatic expungement and community reinvestment grant programs. The bill reflects changing public opinion on cannabis and would put an end to the senseless and racially disparate criminalization of cannabis. The future of the CAOA is uncertain, but it is still likely to influence other federal cannabis reform efforts.
For a more in-depth summary and analysis of the CAOA from WM Policy, including the highlights of the bill and some areas of improvement, keep reading.
Note: this analysis is not inclusive of every provision contained in the CAOA.
- Removal of cannabis from the Controlled Substances Act. The most significant reform included in the CAOA is the removal of cannabis from the federal Controlled Substances Act (CSA). The Controlled Substances Act places substances into one of five schedules based on their propensity for abuse and accepted medical value. Cannabis is currently classified as a Schedule I substance- a designation reserved for substances with “no currently accepted medical use and a high potential for abuse.” Cannabis’ current classification is erroneous and outdated, and taking it off the CSA will eliminate barriers to research, improve access to banking and financial services, alleviate Section 280E tax restrictions, resolve legal uncertainty for state governments and the industry, allow patients to travel across state lines with their medical cannabis, and end the failed policy of cannabis criminalization.
- Automatic expungement for some federal cannabis convictions. Within one year of enactment, this bill would require each federal district to identify and expunge all eligible cannabis-related convictions. Eligible convictions include those that would no longer be considered a crime under the new law. Federal officials would also be required to notify individuals whose records were cleared and issue a certificate of proof of expungement. A certificate of proof will allow an individual to affirm their record was cleared in the event their conviction accidentally appears in an outdated background check database. Further, at any point following the enactment of the bill, individuals have the right to petition for expungement, and those who cannot afford counsel will be appointed legal representation. Expungement is essential to comprehensive cannabis reform efforts, allowing individuals to move on with their lives absent the collateral consequences associated with a criminal record. Further, expungement for cannabis-related records should always be automatic, meaning that the onus for record clearance falls on the appropriate government agency, not the individual. Automatic expungement ensures that all eligible individuals receive relief regardless of their income or access to resources. To date, there is no mechanism for record relief at the federal level (with some extremely limited exceptions), meaning that this bill could set a precedent for future drug-related record clearance efforts.
- Resentencing for individuals serving time for federal cannabis convictions. Within 60 days following the passage of the CAOA, all individuals serving time in federal prison for cannabis-related charges that would no longer be considered illegal would be released, and any pending cases would be dropped. Those serving multiple sentences or those who received a sentence enhancement based on a prior cannabis conviction would be eligible to have their sentences reviewed and potentially reduced. Sentence modification, or resentencing, ensures that individuals no longer serve erroneous sentences for offenses that would not be considered a crime under the new law or would otherwise receive a lighter sentence.
- Funding for local, state, and tribal governments to adopt automatic expungement. In addition to the automatic expungement of some federal cannabis-related convictions, the CAOA creates funding available to local, state, and tribal governments to create an automatic expungement process for cannabis-related offenses. Funding for local and state expungement efforts is critical, as most cannabis-related records exist at the state level.
- Protections for immigrants. Under the bill, cannabis could no longer be a reason to deny benefits or protections to immigrants. This is noteworthy, as cannabis criminalization has historically been used as a mechanism for widespread detentions and deportations of undocumented immigrants. In 2013, minor cannabis possession was the 4th leading cause of deportations, and since 2008, nearly 40,000 people have been deported annually for drug violations.
- Restorative justice grant programs. Throughout the CAOA are a number of restorative justice grant programs aimed at repairing the harms of the War on Drugs, allocating resources to the communities disproportionately impacted by cannabis criminalization, and encouraging the adoption of equitable cannabis licensing frameworks. The Community Reinvestment Grant Program would disburse funding to organizations that provide vital community services to those impacted by the War on Drugs, such as reentry services, legal aid, job training, literacy programs, youth recreation programs, and health education programs. The Cannabis Restorative Opportunity Program would provide loans and technical assistance to small cannabis businesses owned by socially and economically disadvantaged individuals. A minimum of 5% of all available funding in the Cannabis Restorative Opportunity Program would be dedicated to Indigenous-owned businesses. The Equitable Licensing Grant Program would create funding for localities, states, and tribal governments to develop and implement “equitable cannabis licensing programs that minimize the barriers to cannabis licensing and employment” for the individuals adversely impacted by cannabis criminalization. Finally, the CAOA includes a grant program for local, state, and tribal governments to address the housing and community development needs of individuals and communities adversely impacted by the War on Drugs. Restorative justice programs, such as the ones included in the CAOA, are critical for repairing the harms of the War on Drugs. Restorative justice efforts should not just be limited to prospective cannabis business owners, but should also address the needs of the broader communities impacted by cannabis criminalization.
- Medical cannabis for veterans. Within 180 days following the passage of the CAOA, the Secretary of Veterans Affairs would be required to update their internal policies regarding veteran cannabis use. VA physicians and other healthcare providers would be authorized to discuss and recommend medical cannabis with their patients in states with a medical program. Currently, VA physicians cannot recommend medical cannabis to veterans due to federal prohibition, and many veterans do not feel comfortable purchasing legal cannabis due to the incongruence between state and federal law. Though veterans living in states without a medical program would still be unable to purchase legal medical cannabis, this bill would be monumental in expanding access to safe, life-saving medicine for thousands of veterans across the country. (To read more about why cannabis access is a veterans issue, check out the latest WM Policy blog post).
- Data collection and reporting requirements. The CAOA includes a number of data collection and reporting requirements for the cannabis industry. The bill tasks several federal agencies with collecting and publishing information on the demographic data of cannabis business owners and employees, the societal impact of adult-use legalization, the economic and revenue impact of the industry, impaired driving data, and more.
- Research expansion and funding for new research. The CAOA would expand opportunities for cannabis research by making it easier to study the plant and funding studies on several important topics. The bill would require the federal government to “take steps to increase the availability and diversity of research-grade cannabis products,” as well as allow researchers to study cannabis available to consumers in legal states. Further, the bill provides funding and directs a number of federal agencies to study the medical effects of cannabis, best practices to prevent underage cannabis consumption, the impact of legalization on the workplace, the impact of medical cannabis on veteran health outcomes, and cannabis-impaired driving.
Due to the limitations of studying a Schedule I substance, there is a gap in cannabis research and data collection on the legal cannabis industry. The data collection, research, and reporting requirements outlined in the CAOA will be essential in producing much-needed research, gathering comprehensive demographic data on the industry, and evaluating the efficacy of existing cannabis policies— all essential building blocks of evidence-based public policy.
- SBA loans for cannabis businesses. Due to federal prohibition, cannabis businesses are precluded from applying for funding programs through the Small Business Administration. The CAOA creates protections for all cannabis businesses and cannabis-related service providers that apply for loans, investment capital, disaster assistance, grants, and other federally-backed funding programs. Further, the CAOA would create a 10-year pilot program through the Small Business Administration for third-party servicers to provide loans to small cannabis businesses owned by socially and economically disadvantaged individuals and those adversely impacted by the War on Drugs. Lack of funding and access to trustworthy financing options is one of the largest barriers to entering the legal cannabis industry, and this pilot program would expand the number of non-predatory lending options available to small and social equity-owned businesses.
- 280E tax reform and access to banking and other financial services. Because the CAOA would remove cannabis from the Controlled Substances Act, banks and other financial institutions would no longer be subject to the same risks and restrictions associated with working with businesses involved in a Schedule I substance. The Financial Crimes Enforcement Network (FinCEN) would be required to update its previous guidance, or issue new regulations, outlining how banks and other financial service providers could work with the cannabis industry. Currently, most banks are unwilling to work with cannabis businesses, despite guidance from FinCEN, leaving the majority of the industry unbanked and barred from accessing traditional financial services available to all other businesses. The CAOA would significantly improve banking access for the cannabis industry, reducing public safety risks associated with operating entirely in cash and bringing further legitimacy to the legal cannabis industry. Additionally, because cannabis would no longer be a Schedule I substance, cannabis businesses would not be subject to IRC 280E restrictions that currently prevent cannabis businesses from claiming ordinary and necessary deductions when paying federal income tax.
The Areas of Improvement
- High federal excise tax rates. The CAOA would impose a federal excise tax starting at 10% that gradually increases to 25% over five years. Small and medium-sized “qualified domestic manufacturers” are eligible for a 50% tax credit. A 25% federal tax is notably higher than the 8% tax included in the MORE Act and would greatly exacerbate the already-high tax burden cannabis businesses currently face. Depending on the jurisdiction, cannabis businesses are subject to a state excise tax, state sales tax, and any applicable local taxes. High taxes raise the price of legal cannabis for consumers and patients, making it much more likely they will continue purchasing cheaper products from unregulated sources. Further, overly-high taxes will harm small and social equity-owned businesses struggling to stay afloat more than large, well-capitalized multistate operators. While a tiered tax scheme that includes lower taxes for small businesses is a good policy, the proposed 12.5% tax rate is still far too high.
- No tax exemption for medical cannabis patients. The tax scheme proposed in the CAOA does not include any exemptions for medical cannabis. The 25% excise tax would be passed onto medical cannabis patients, significantly increasing the price of their medicine. Medical cannabis patients already pay out-of-pocket for their medicine since insurance does not cover medical cannabis. In many states, registered patients are exempt from paying certain taxes when purchasing medical cannabis. Medicine should not be subject to excise taxes, including medical cannabis. Cannabis producers should be allowed to designate a portion of their inventory for medical patients, which would then be exempt from the excise tax.
- Expungement provisions do not include non-conviction arrests. According to the language in the CAOA, it appears that the automatic expungement provisions do not include non-conviction arrests. Federal districts must expunge “each conviction” and “arrests associated with each conviction” for certain cannabis-related offenses. A conviction occurs when a formal declaration of guilt is made against an individual. However, in many cases, an arrest does not lead to a conviction, but a record of that arrest still exists in one’s criminal record. While a process exists to challenge one’s federal arrest record, petition-based expungement prevents many from having their record cleared because of a lack of resources or even awareness that the record exists. The automatic expungement language should be expanded to include non-convictions of cannabis-related offenses.
- Ban on flavored vaping products. The CAOA would prohibit the manufacture and sale of flavored electronic delivery systems, commonly known as cannabis vapes or vaporizers. A ban on flavored cannabis vapes would not reduce demand for these products but instead would likely push consumers to seek out flavored vapes from unregulated, untracked, and unsafe sources. Instead of banning popular products that are widely available in both legal and illicit cannabis markets, the federal government should instead require that these products are subject to strict lab-testing requirements, in child-proof packaging, and not being advertised to children. Further, the CAOA prohibits the use of an artificial or natural flavor that is a “characterizing flavor,” such as orange, cocoa, chocolate, etc. Many vaping manufacturers add terpenes– chemical compounds found in cannabis that have distinct smells and flavors– to their vape products. It’s unclear if this process would be banned under the CAOA, even though terpenes are naturally occurring and some have distinct flavors, such as lemon or berry.
Recommendations and Future Considerations
- Minimize federal permitting requirements and avoid cumbersome reporting rules. Any additional layers of federal permits and approvals should be easy to comply with and low cost. Cannabis businesses are already subject to a number of burdensome application and license requirements, such as high fees, exorbitant capitalization requirements, and rules requiring applicants to secure property before submitting an application. Federal permitting requirements should be kept to a minimum, allowing states to adopt more stringent rules if they wish. Additionally, any federal track-and-trace software should integrate with existing state track-and-trace programs, instead of creating duplicative tracking requirements for cannabis operators.
- Establish a cannabis antitrust and interstate commerce task force or commission. An antitrust and interstate commerce task force or commission should be formed to guide the federal government on how to regulate interstate commerce and best protect small and medium-sized cannabis businesses. Absent any safeguards to protect small cannabis businesses, many fear that a sudden allowance of interstate commerce will lead to rapid consolidation and the elimination of many small and social equity-owned businesses. A careful, measured approach to interstate commerce can avoid significant disruption to existing state cannabis programs.
- Ensure all efforts to combat the unregulated cannabis market focus on bolstering the legal industry and transitioning legacy operators. The CAOA includes a number of grants for police departments to combat the unregulated cannabis market. The best way to minimize the unlicensed cannabis market is by supporting a robust, legal cannabis industry and creating pathways for legacy operators to transition to the legal market. (For more information on how to minimize the unregulated market, check out our policy paper).
- Fund a national disparity study. The CAOA should include a requirement that the federal government fund a national disparity study to determine if racial, ethnic, and/or gender inequities exist in the provision of cannabis business licenses in states with legal cannabis programs. The study should also examine the efficacy of local and state programs designed to promote cannabis business ownership and employment opportunities for individuals adversely impacted by the so-called “War on Drugs” (commonly referred to as “social equity programs”). A national science-based study will help determine if and where inequities exist in cannabis licensing at the state level and whether social equity programs have been effective in increasing the market participation of communities disproportionately harmed by these efforts.
- Fund a national study to identify areas of disproportionate impact. The CAOA should also include a requirement for the federal government to conduct a national study to identify areas disproportionately impacted by cannabis criminalization. These disproportionately impacted areas should be at the census tract level and defined in terms of socio-economic factors and areas of concentrated over-policing of outdated cannabis enforcement policies. Several state and local governments have conducted similar studies to help inform the eligibility requirements for participation in their cannabis social equity program. A national study of disproportionately impacted areas should not serve to undermine existing social equity efforts. Instead, a national study could be used as the basis for future local and state social equity programs and to determine eligibility for federal programs and benefits geared toward the communities adversely harmed by the so-called “War on Drugs.”
The Cannabis Administration and Opportunity Act is an important first step in federally decriminalizing cannabis and making much needed reforms to antiquated laws. We applaud the sponsors of this important legislation for introducing this comprehensive, meaningful legislation and we look forward to working with them to improve this bill for the benefit of all Americans.