Today, December 18, 2025, President Donald Trump took a major step toward federal cannabis reform by directing an accelerated move of marijuana from Schedule I to Schedule III under the federal Controlled Substances Act.
This is not federal legalization.
Even with Schedule III, cannabis remains federally controlled, and most state legal products are still not FDA approved drugs.
Still, the shift matters because it changes the risk profile for cannabis operators, investors, landlords, lenders, and service providers across the country, and it has the potential to reshape economics across the cannabis legal supply chain in both New York and California.
From our cannabis legal team at Seligson Law, here is a practical market focused look at what could change, what likely will not, and why New York and California may experience different second order effects.
The Biggest Near Term Lever: 280E Relief and Cash Flow
The single most immediate economic impact of a move of cannabis to Schedule III is taxes. Internal Revenue Code Section 280E generally disallows ordinary business deductions for businesses trafficking in Schedule I or Schedule II substances. If cannabis is treated as Schedule III, 280E should no longer apply, which can materially reduce effective federal tax rates and materially increase after tax cash flow for compliant operators.
Why this matters in the real world:
- Stronger operators may finally become meaningfully profitable on a normalized basis, especially retailers and vertically integrated businesses with high payroll, rent, and compliance costs.
- Balance sheets could improve quickly because more cash stays in the business rather than being paid out in federal tax.
- Access to capital could improve as underwriters and lenders re-run models using materially higher post tax cash flow.
This is the piece that can move markets even if nothing else changes.
What Schedule III Does Not Automatically Do
It is important to separate economics from legality.
- Schedule III does not equal federal legalization.
- Schedule III does not automatically fix cannabis banking, uplisting rules, or interstate commerce.
- Schedule III can increase the pace of research and drug development, but it also reinforces the idea that federally lawful cannabis pathways run through FDA style frameworks.
In other words, operators may get meaningful tax relief, but they should not assume all federal friction disappears.
New York Cannabis Market: Likely Winners and Pressure Points
New York’s cannabis adult use market is still capacity constrained relative to consumer demand and is still building out licensed retail, distribution, and brand infrastructure. Against that backdrop, Schedule III dynamics can play out in a few distinct ways.
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Better unit economics could accelerate market maturation.
If 280E relief lands cleanly, New York licensees that have been operating on thin margins could see immediate cash flow relief, allowing.
More reinvestment into compliant operations, staffing, and inventory.
More ability to finance buildouts and withstand regulatory delays.
That matters in New York because many operators are still in growth mode rather than optimization mode.
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Capital may chase New York retail footprints.
Because New York is still a growth market, investors who were sitting on the sidelines may view tax normalized projections as more bankable, particularly for retail and for brands with real differentiation.
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Competition could intensify faster than expected.
More capital plus better cash flow can mean faster entry and faster scale. That can benefit consumers through more retail access and better pricing, but it can also compress margins for smaller operators sooner than they planned.
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Regulatory disputes may continue, just on different terrain.
Nothing about Schedule III removes state licensing constraints, state enforcement priorities, or local siting battles. New York’s core market issues will still be driven by state and local implementation, not by the federal schedule label.
California Cannabis Market: Relief that Helps, but Does Not Solve Structural Problems
California is the largest legal market for cannabis, but it has been defined by price compression, high taxes, intense competition, and an enormous illicit market. Rescheduling can help with cash flow, but it does not directly fix California’s structural constraints.
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280E relief may be a lifeline for some operators.
For compliant California operators, 280E relief can be meaningful because so many businesses are trapped in a cycle of high tax burden plus declining wholesale prices. Removing 280E pressure can keep more businesses alive, particularly retail and smaller integrated operators, and may reduce distressed asset sales.
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Expect consolidation pressure to continue.
Even with better federal tax treatment, California’s oversupply dynamics and local retail bottlenecks remain. Some businesses will use the cash flow bump to scale, acquire, or outcompete. Others will use it just to survive. That typically accelerates consolidation over time.
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Illicit market dynamics may not move much.
Schedule III does not automatically change state tax rates, local licensing scarcity, or enforcement capacity. If legal products remain materially more expensive than illicit alternatives, the illicit market may stay resilient, even if some legal operators become healthier.
Cross Market Impacts To Watch For in Both States
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Banking and payments behavior, even without new statutes.
Even if no new banking law passes immediately, some institutions may become more willing to engage at the margins when the federal posture looks less hostile, especially if the executive action signals lower enforcement temperature. The result may be incremental improvements, not a full reset.
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Research, medical positioning, and product development.
Schedule III can make research easier and could encourage more formal medical product development pathways. That may benefit companies with GMP ambitions, defensible IP, or clinically oriented product strategies. It may also increase compliance expectations around labeling and health claims over time.
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Public market sentiment and valuation swings.
As seen immediately in market reactions, rescheduling headlines can move public cannabis equities and ETFs quickly. For private operators, that can translate into shifting investor appetite, term sheets that re price risk, and renewed M and A discussions.
What’s the Bottom Line for New York and California Cannabis Operators?
New York is likely to experience rescheduling primarily as a growth accelerant, by improving cash flow and making capital formation easier in a market still building out licensed capacity.
California is likely to experience rescheduling primarily as a margin stabilizer, by reducing one major federal tax drag while leaving the hardest problems, pricing, taxes, local access, and illicit competition, largely intact.
In both states, the headline is huge, but the details matter. The market impact will be driven less by symbolism and more by whether 280E relief is realized in practice, how quickly regulators implement the scheduling change, and whether Congress follows with banking or other reforms that Schedule III does not itself deliver.
Schedule III Changes and Your Cannabis Business
The move to Schedule III creates both opportunities and challenges for cannabis operators, investors, and service providers in New York and California. Our cannabis legal team at Seligson Law can help you understand how these changes affect your business, plan for tax and compliance implications, and navigate evolving federal and state regulations.
Contact us today to discuss your situation and protect your operations as the market evolves.
