Federal Cannabis Rescheduling: What It Means for California and the Path Forward

Today’s announcement by the Trump Administration to reclassify medicinal cannabis marks a significant shift in national drug policy and a meaningful step toward aligning federal law with states like California. CaCOA is continuing to review the 33-page executive order, and additional analysis will be forthcoming.

For years, California has led the nation in building a comprehensive, highly regulated cannabis marketplace grounded in public health, public safety, and accountability. This federal action does not replace that system, but it does begin to acknowledge it.

At its core, rescheduling reflects a long-overdue recognition that cannabis has accepted medicinal value. While the decision stops short of federal legalization, its implications for state-legal markets, such as California's, are significant and likely to grow as the federal rulemaking process progresses.

“California has spent years building a comprehensive, highly regulated cannabis market grounded in public health, public safety, and accountability. Today’s decision by the Trump Administration to accelerate the reclassification of medicinal cannabis is an important step toward aligning federal policy with that reality.

For too long, federal tax policy has placed compliant operators at a significant disadvantage, undermining the very system designed to replace the illicit market. By removing the punitive impact of Section 280E, we can improve the financial sustainability of licensed businesses and strengthen the regulated marketplace.

A more viable legal market enhances enforcement efforts, protects consumers, and reinforces the importance of purchasing tested, regulated products rather than unlicensed or unregulated alternatives that operate outside established public health and safety standards.

This is not the end of the conversation. Still, it is a meaningful step toward a more rational federal approach that supports states that have chosen to regulate cannabis responsibly and prioritizes enforcement against illicit and unsafe products, including intoxicating products sold outside of the regulated system."

Amy O'Gorman Jenkins, Executive Director of the California Cannabis Operators Association

What This Means for States That Have Legalized Cannabis

The reclassification of cannabis presents several important opportunities for states like California that have established robust regulatory frameworks.

While the administration has taken formal action based on cannabis’ recognized medicinal use, full implementation remains subject to the federal rulemaking process, including additional procedural steps and potential hearings. 

As this process moves forward, several key areas of potential benefit for state-regulated markets are emerging:

1. Significant potential tax relief for licensed operators: This represents one of the most meaningful potential impacts for state-regulated markets. If and when finalized, reclassification from Schedule I to Schedule III would remove the application of IRS Code Section 280E, which has long prevented legal cannabis businesses from taking standard business deductions. As a result, many licensed operators have faced effective tax rates approaching 70 percent, placing them at an extreme disadvantage. The extent to which this relief applies across the full range of state-legal cannabis activities will depend on how the final rule is structured and implemented, including any distinctions drawn between medicinal and non-medicinal products. Notably, the executive action also encourages the U.S. Department of the Treasury to consider retroactive tax relief for prior years. If pursued, this could provide significant financial benefit to licensed operators.

   
   

2. Potential for increased investment and access to capital: Reclassification may also reduce perceived legal and financial risk associated with the cannabis industry, which could expand access to capital and investment over time. Federal recognition of cannabis’ medicinal value signals increased legitimacy and may help unlock additional financing opportunities, including from institutional investors that have historically remained on the sidelines. For state-regulated markets, this could result in increased investment in compliant businesses, support the scaling of licensed supply chains, and improve the overall competitiveness of the legal market relative to illicit operators.

   
   

3. Reinforcement of state-regulated frameworks: Importantly, this federal action does not alter or override existing state cannabis programs. Rather, it reinforces the regulatory frameworks that states like California have established over time. By recognizing cannabis’ medicinal use, the federal government is beginning to align with the policy decisions made by states that have chosen to regulate cannabis through licensed, accountable systems. This reinforces the role of state-regulated markets as the foundation of cannabis policy and supports continued implementation of robust public health, safety, and enforcement standards.

   
   

4. Greater alignment between federal and state cannabis policy: For years, federal law has remained out of step with the widespread adoption of medicinal cannabis at the state level. With approximately 40 states allowing medicinal cannabis in some form, this reclassification represents a critical step toward greater federal and state policy alignment. It may help lay the groundwork for more cohesive policy development over time. While additional federal action will be needed to harmonize the system fully, this shift signals meaningful progress in that direction.

Next Steps: Federal Cannabis Rescheduling

While the federal government has announced its intent to reclassify cannabis based on its recognized medicinal use, the change has still not been finalized through a formal rulemaking process led by the Drug Enforcement Administration (DEA) under the Controlled Substances Act.

The next anticipated step is the publication of a proposed rule in the Federal Register, which would formally initiate the rulemaking process. Reports suggest that initial procedural steps could commence as early as June.

As part of this process, the DEA is expected to convene an administrative hearing, with current reporting indicating proceedings could begin as early as June 29, 2026. A notice of hearing is anticipated to be published in the Federal Register to govern these proceedings and facilitate the timely resolution of rulemaking. As with all aspects of the federal process, timing remains subject to change.

Once initiated, the rulemaking process is expected to include a public comment period, during which stakeholders may submit input, followed by a final rule establishing the revised scheduling classification. Until that process is complete, the proposed reclassification has not yet taken effect.

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