Change in how feds see marijuana could mean big tax cut for pot retailers

The Biden administration is rethinking how it classifies marijuana under a federal list of drugs, a move that could allow the cannabis industry to save potentially billions in federal taxes each year because it would allow producers to write off their business expenses.

The proposal, recommended by the Department of Health and Human Services and under consideration by the Drug Enforcement Administration, also would open up the possibility that medical researchers could study the benefits and risks of marijuana as a potential drug.

Industry advocates called the proposal a welcome development, but one that still falls short of reconciling the federal government's ban on the drug and state laws that accept marijuana use.

"The only way to fully resolve the myriad of issues stemming from the federal conflict with state law is to remove cannabis from the Controlled Substances Act and regulate the product in a manner similar to alcohol," said National Cannabis Industry Association CEO Aaron Smith in a statement.

Under the plan, which could take months to more than a year to finalize, the DEA would no longer regard marijuana as a Schedule I drug. That designation puts marijuana in the same camp as heroin and LSD -- a drug with a high potential for abuse and no medical use. The new plan, if approved, would drop marijuana to Schedule III, easing restrictions and putting it on par with drugs like Tylenol with Codeine.

The change though would not alter the drug's status though as illegal under federal law.

Bloomberg first reported the HHS recommendation on Wednesday. A senior administration official confirmed the recommendation to ABC News Thursday.

Last fall, President Joe Biden said reducing penalties tied to marijuana was a priority.

"While white and Black and brown people use marijuana at similar rates, Black and brown people have been arrested, prosecuted, and convicted at disproportionate rates," he said in October.

Andrew Freedman, executive director of the Coalition for Cannabis Policy, Education, and Regulation, said he expects the change would actually do very little to change how marijuana is treated in criminal cases for the average person. That's because such prosecutions tied to marijuana possession are mostly at the state level.

In recent years, the Justice Department hasn't made enforcing a federal law banning marijuana as a priority.

The much bigger impact, Freedman said, would likely be economically. By reclassifying the drug, cannabis would no longer be subject to an IRS rule that specifically prohibits tax write-offs for businesses "trafficking" controlled substances. According to the National Cannabis Industry Association, cannabis pay tax rates as much as 70%.

Beau Whitney, an economist who specializes in researching the cannabis industry, said he estimates that marijuana businesses could save as much as $2 billion a year or more in their federal tax bill if businesses can deduct their expenses on their tax returns.

Freedman said that tax benefit is much more likely to be a consequence of rescheduling the drug under the DEA.

"Listen, anytime that there's any progress on cannabis in the United States over the last 100 years -- it's a big, huge momentous day," he said. And this announcement by a federal agency said "yeah, we were not treating this rationally," he added.

But the change won't provide production standards, universal labeling or childproof packaging.

"There's a lot more the federal government needs to be stepping in on and this is not any of that," he said.

ABC News' Luke Barr and Molly Nagle contributed to this report.