Moving marijuana to Schedule III could deliver a major federal tax break to Michigan cannabis businesses. But something much bigger — federal legalization — would be needed before Michigan growers could legally ship recreational marijuana across state lines.
WASHINGTON DC – Michigan’s cannabis industry could be approaching two very different federal turning points — and the distinction between them could determine whether struggling marijuana companies merely get tax relief or eventually gain access to an entirely new national market.
A new analysis from Yale University’s Budget Lab estimates that federal marijuana legalization combined with a federal THC excise tax could generate $57.9 billion over 10 years.
For Michigan, however, the potentially bigger story is what legalization could do to a cannabis market already struggling with falling prices, intense competition and enormous inventories.
Michigan consumers bought about 116,560 pounds of adult-use flower during July, generating nearly $110 million in sales.
Yet at the end of July, Michigan’s regulated marijuana industry was holding nearly 964,000 pounds of flower at growers, processors and retailers.
That’s the equivalent of more than eight months of July flower sales, based on a MITechNews calculation using Cannabis Regulatory Agency data.
Federal legalization potentially could knock down the walls surrounding that closed market.
Instead of Michigan marijuana being produced primarily for Michigan consumers, growers eventually could gain access to customers across the country if federal law permits interstate recreational cannabis commerce.
That raises a provocative possibility:
Could Michigan’s marijuana glut eventually become an export industry?
Michigan Has Built A Huge Cannabis Production Machine
The latest CRA numbers illustrate the scale of Michigan’s supply.
As of July 31, Michigan’s adult-use market was holding approximately 159,979 pounds of tested flower at growers, 218,607 pounds at retailers and 585,839 pounds at processors.
There’s considerably more cannabis elsewhere in the production pipeline.
Processors held another 474,364 pounds of fresh-frozen flower, while growers had approximately 231,466 pounds.
Fresh-frozen marijuana is generally destined for processing and shouldn’t simply be added to finished flower inventory. But the numbers illustrate the enormous volume of cannabis moving through Michigan’s regulated system.
And more is growing.
Michigan had 696,985 adult-use plants flowering at the end of July and another 499,927 plants in the vegetative stage. Growers harvested 320,972 plants during July alone.
Michigan also had 798 active Class C grower licenses, 61 Excess Grower licenses and 836 retailers.
That enormous production base has contributed to intense price competition and some of the country’s least expensive legal marijuana.
For consumers, cheap cannabis has been a bargain.
For growers and retailers, it has become a survival problem.
Michigan’s Oversupply Is Trapped Inside Michigan
Michigan’s oversupply isn’t simply a matter of producing too much marijuana.
It is also a consequence of producing for a market surrounded by federal walls.
Recreational marijuana generally cannot legally cross state lines because it remains prohibited under federal law.
That leaves Michigan growers competing against one another for Michigan consumers and visitors rather than selling surplus production into other states.
Full federal legalization could potentially change that.
Yale specifically identifies restrictions on interstate commerce as one of the structural barriers federal legalization could remove.
If a future federal regulatory system permitted interstate recreational marijuana commerce, Michigan producers could potentially sell into markets where marijuana prices are higher.
That could provide an escape valve for Michigan’s massive inventory problem.
But there’s an important catch.
Interstate commerce works both ways.
California, Oregon and other major cannabis-producing states could potentially ship marijuana into Michigan.
Michigan therefore wouldn’t simply gain an export market. Its growers would enter a national price war in which the most efficient producers would have an advantage.
Michigan’s years of brutal price competition could actually prove useful. Its growers already have experience operating in an unusually low-price cannabis market.
Schedule III Would Not Open The Border
That’s where an important distinction enters the story.
Moving marijuana from Schedule I to Schedule III would not allow a Michigan recreational grower to start shipping cannabis to Ohio, Indiana or Illinois.
The Congressional Research Service says manufacture, distribution and possession of recreational marijuana would remain illegal under federal law following Schedule III rescheduling, regardless of whether those activities are permitted under state law.
So Schedule III and federal legalization would potentially solve two very different Michigan cannabis problems.
Schedule III could provide major federal tax relief.
Broader federal legalization could eventually provide access to interstate commerce.
That distinction matters enormously for Michigan.
Schedule III Could Eliminate 280E
One of the most significant consequences of moving marijuana to Schedule III involves Section 280E of the Internal Revenue Code.
Section 280E applies to businesses trafficking in Schedule I or Schedule II controlled substances.
Because marijuana is generally treated as Schedule I, cannabis companies cannot deduct many ordinary business expenses when calculating federal taxable income.
A conventional Michigan retailer generally can deduct expenses such as payroll, rent, utilities, insurance and marketing.
Cannabis companies subject to 280E generally cannot.
But Schedule III isn’t covered by Section 280E.
The Congressional Research Service concludes that moving marijuana to Schedule III would therefore allow marijuana businesses to deduct business expenses on their federal tax filings.
That means Michigan cannabis companies potentially wouldn’t have to wait for full federal recreational legalization to receive one of legalization’s largest financial benefits.
They could potentially receive the 280E tax break under broader Schedule III rescheduling while Michigan recreational marijuana remained federally illegal.
Then Comes A Potential New Federal Marijuana Tax
Full legalization presents a different tradeoff.
Washington could eventually tax cannabis.
Yale modeled a federal excise tax of $0.00625 per milligram of THC, collected from producers when marijuana moves to a retailer.
Under Yale’s assumptions, the tax would add approximately $1.31 to a gram of marijuana, based on a national average price of $8.59 per gram and the potency assumptions used in its model.
That represents roughly a 15% increase in Yale’s tax-inclusive price.
The potential effect in Michigan deserves particular attention because Michigan marijuana prices are substantially lower than Yale’s national assumption.
A potency-based tax doesn’t automatically shrink simply because marijuana is inexpensive.
That means the same dollar tax can represent a much larger percentage increase on inexpensive Michigan cannabis than on marijuana sold at higher prices elsewhere.
Michigan consumers already pay the state’s 10% marijuana excise tax and 6% sales tax, while the industry also faces Michigan’s 24% wholesale marijuana tax.
A federal THC tax would add another cost to the system.
Consumers And Businesses Could Want Different Things
This produces one of the more unusual economic consequences of federal marijuana reform.
What’s good for Michigan cannabis companies may not necessarily be good for Michigan consumers.
Schedule III could dramatically improve cannabis company finances by eliminating 280E.
Interstate commerce could allow Michigan growers to ship surplus production elsewhere, reducing the oversupply depressing prices.
But reducing that oversupply could also raise marijuana prices inside Michigan.
Michigan consumers who have benefited from years of falling cannabis prices could suddenly find themselves competing indirectly against buyers elsewhere for Michigan-grown marijuana.
Growers might welcome that development.
Consumers might not.
More Than 41,000 Michigan Jobs Are Involved
The stakes extend well beyond dispensaries.
Michigan’s regulated marijuana industry reported 41,257 employees as of July 31, according to the CRA.
Those jobs include cultivation, processing, manufacturing, testing, transportation, security, compliance and retail operations.
Federal marijuana reform therefore isn’t simply a debate over whether cannabis should be legal.
For Michigan, it increasingly is an economic policy question involving jobs, taxes, business survival, consumer prices and potentially interstate trade.
Michigan Could Become A Cannabis Export Powerhouse — Or Face A National Price War
Michigan has built a cannabis production system considerably larger than the market it is currently allowed to serve.
The numbers make the imbalance difficult to miss.
About 116,560 pounds of adult-use flower sold in July.
Nearly 964,000 pounds remained in flower inventory at growers, processors and retailers at month’s end.
And hundreds of thousands of plants were still heading toward harvest.
Schedule III alone won’t open Michigan’s borders to recreational cannabis exports.
But it could eliminate one of the industry’s biggest federal tax burdens.
Full federal legalization could go much further by potentially creating a national marijuana market — while Washington simultaneously collects billions of dollars in new cannabis taxes.
For Michigan, that could transform oversupply from one of the industry’s greatest weaknesses into a potential competitive advantage.
Or it could expose Michigan growers to an even larger national battle over who can produce marijuana for the lowest price.
Either way, Michigan’s cannabis industry would never look the same.
