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In anticipation of the U. S. Drug Enforcement Administration’s (DEA) upcoming decision on marijuana rescheduling, the cannabis industry braces for what could be the most significant change in U.S. marijuana policy in half a century. The potential rescheduling carries the promise of tax reform, specifically the elimination of Section 280E from the federal tax code. The section has been a financial burden on state-legal marijuana retailers and has repercussions throughout the supply chain.
As we look ahead, here are five predictions for the cannabis industry in the coming year:
Rescheduling marijuana and eventual tax relief
The DEA is likely to propose the rescheduling of cannabis, aligning with the HHS’ recommendation to move the substance from Schedule I to Schedule III of the Controlled Substances Act. This acknowledgment of marijuana’s medical value, influenced by state-provided data, initiates the ongoing administrative review launched by the Biden Administration in October 2022. Legal challenges are likely to follow.
Rescheduling would bring tax relief as Section 280E’s constraints on federal tax deductions for state-legal marijuana businesses would cease. This change holds the potential to inject more financial strength into the $34 billion U.S. cannabis industry. Some businesses are already seeking refunds, setting the stage for potential shifts in the industry’s financial landscape.
Federal progress in limbo
While banking reform legislation gained traction in 2023, the chances of its passage in the current Congress are uncertain. A mere 13% of senior congressional aides anticipate success, signaling potential deadlock. The hope for federal Farm Bill amendments addressing hemp-derived competition persists, but state-level hurdles might complicate matters.
Next legalization frontiers
Pennsylvania and Florida emerge as potential candidates for the next states to legalize cannabis. Ohio’s recent move toward adult-use marijuana suggests a shifting landscape, prompting attention to Florida’s 2024 ballot and Pennsylvania’s legislative developments, despite partisan divisions.
Combating the illicit market
States are gearing up to tackle the burgeoning illicit market, exemplified by New York’s struggle with unlicensed sellers. While legal retail capacity expands, the effectiveness of new options in redirecting customers away from the illicit market remains uncertain. Regulators face the challenge of balancing enforcement and incentives.
Social-equity challenges
States have been grappling with the implementation of social-equity promises in the legal cannabis industry. New York’s attempts to prioritize small businesses face constitutional challenges, prompting a reevaluation of strategies to ensure equitable participation. The industry is under pressure to address legal challenges from excluded entrepreneurs, necessitating innovative solutions.
As the industry navigates these potential developments, 2024 promises transformative shifts in policy, taxation and societal impact. Enterprises such as Tilray Brands Inc. (NASDAQ: TLRY) (TSX: TLRY) will be looking for any new opportunities that they can leverage to deepen their penetration in jurisdictions with legal cannabis markets.
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