The nature of the marijuana debate has shifted recently. In the Senate, bipartisan legislation–the Compassionate Access, Research Expansion, and Respect States Act of 2015–is being considered that permit nationwide medical marijuana and provide deference to states’ decision making in its regulation. So far, the bill is still in its introductory stages. Nonetheless, the ways in which the bill does not normalize the marijuana industry are important to potential market participants.

Political Headwinds and Positive Change

The bill’s bipartisan support—sponsored by Democratic Senators Kristen Gillibrand and Cory Booker and Republican Senators Rand Paul and Dean Heller—marks a change in the political headwinds. While traditionally any attempt to legalize marijuana was considered a left-wing position, now conservatives are embracing states’ prerogatives to legalize medical and/or recreational marijuana in keeping with a federalist philosophy.

Surely, this will incentivize states interested in legalizing recreational marijuana to simply adjust the regulatory scheme for medical marijuana by lowering the threshold for access. In doing so, virtually all those interested in legal marijuana use will qualify for “medical” marijuana even if they are only interested in marijuana for recreational use. As result, states would create de facto recreational marijuana, yet they will effectively circumvent the federal government’s Schedule II regulations.

Medical Marijuana Industry

The medical marijuana industry, including thousands of affiliated businesses, will gain new frontiers working with throughout the United States. They will be, at least partially, legitimate. The entire country will have marijuana rescheduled, making legal the sale, distribution, and research of marijuana for medical use. In many states that are without medical marijuana laws, the drug will fall under blanket Schedule II regulations concerning refills and manufacturing registration requirements.

The bill provides for an increase in marijuana research, which could potentially be life-saving. The ability for states and educational institutions to conduct marijuana research could result in medical breakthroughs. Marijuana research holds promise for discovering treatments and cures for various illnesses. This enhancement of research funding will benefit the industry, research workers, and hopefully society.

All in all, this bill would be a great boon for medical marijuana: legalizing the underlying medical marijuana would legalize investment in the industry. Yet, regularization of the medical marijuana industry would presumably create a patchwork of regulations that the marijuana industry would have to comply with. These regulations may impair the possibility of investment in the industry

Safe Harbor for Banks

Currently, depository institutions, or banks that do business with marijuana companies, risk and losing their depository insurance. This bill would make it safe for banks to work with legitimate or state-approved marijuana companies. Certainly, the bill’s safe-harbor provision for depository institutions that do business with the legitimate medical marijuana industry will stimulate investment in and loans to medical marijuana businesses.

But, the safe-harbor provision is unclear regarding regulation of recreational marijuana. While the safe-harbor provision does not limit itself to medical marijuana, the rest of the bill only authorizes states to create their own regulatory system regarding medical marijuana. As such, a bank would need further regulatory guidance to know whether a recreational marijuana shop in, say, Colorado is worth doing business with. This is an ambiguity that Congress should clarify before passing the bill and leaving it to regulators to interpret.

A Medical Incentive for States

Numerous states and areas—Alaska, Oregon, Washington, Colorado, and Washington, D.C.—have recognized legal recreational marijuana. However, even if this bill passes, businesses and consumers in these states would not be given a shield: recreational use of marijuana would still be a federal offense. Yet, the states are allowed to set low thresholds for medical marijuana, meaning easier access to the legal medical marijuana.

This could result in large disparities in the treatment of two businesses serving the exact same type of customer. For example, imagine State A permits medical marijuana for patients with relatively minor medical conditions. On the other hand, State B legally permits recreational marijuana. Almost all patients in State A will become qualified for medical marijuana use; essentially anyone who seeks legal access to medical marijuana will be granted permission. Comparatively, State B could find its businesses subjected to the onerous banking and tax regulations that are currently crippling the marijuana industry. Further, State B will fall under Schedule II regulations. Thus,

Surely, this will incentivize states interested in legalizing recreational marijuana to simply adjust the regulatory scheme for medical marijuana by lowering the threshold for access. In doing so, virtually all those interested in legal marijuana use will qualify for “medical” marijuana even if they are only interested in marijuana for recreational use. As result, states would create de facto recreational marijuana, yet they will effectively circumvent the federal government’s Schedule II regulations.

Tax Implications

Senator Paul’s proposal may also be hindered by one of his least favorite federal bureaucracies: the IRS. Further, a much-cited impediment to marijuana legalization, the Internal Revenue Code §280E prohibition on regular business deductions for drug-related business, could arbitrarily remain in effect. Certainly, §280E was intended to include Schedule II drugs. It is unclear whether under this bill a marijuana business that falls outside the regulatory compliance safe harbors would be treated as a drug dealer for tax purposes.

For instance, what if a medical marijuana dispensary lets a bureaucratic permit expire or else falls outside the letter of state law? Will the IRS interpret this bill to let non-compliant marijuana businesses fall into §280E? Not being allowed to deduct expenses could put a businesses at risk of staggering tax bills that would otherwise be reduced by tax deductions. A perfect bill would clarify that this risk should be contained.

What About Puerto Rico and Guam?

An interesting “bug” in the bill is that it gives no special local decision making to  , such as  and Guam. States are given the right to make regulations granting more access to marijuana or special compliance schemes outside the confines of federal Schedule II regulations. Guam and Puerto Rico, as well as other non-state territories called insular areas, are given no such rights. As such, this disparity could negatively impact the economy of these regions that may wish to incentivize cultivation of marijuana.

Conclusion

Ultimately, the Compassionate Access, Research Expansion, and Respect States Act of 2015 promises to do a lot of good for patients, businesses, banks, and investors who are interested in the marijuana industry. However, the bill, as it stands, contains numerous issues that need to be resolved before signing in order to achieve its aim of producing a marijuana industry that is safe, stable, and secure.