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This piece was published in in The Conversation on January 29, 2026. View the original article .

In December 2025, the Trump administration accelerated the process of from to under the – a shift that would and the drug.

Under the move, medical and recreational marijuana would still remain illegal at the federal level. At the state level, medical use is in 40 states and the District of Columbia, and recreational use is permitted in 24 states and Washington, D.C. While the administration touted the of rescheduling, the medical and recreational marijuana industry for an entirely different reason: .

Indeed, one of rescheduling’s – and most immediate – effects would be tax relief for all legal marijuana businesses in the states that host them.

But business taxes do – they also create incentives that . For legal marijuana businesses – both medical and recreational dispensaries alike – rescheduling marijuana would relax these implicit restrictions, serving as a quiet form of deregulation that removes tax pressures that currently shape the industry’s financing, structure and compliance. From this perspective, rescheduling would cut taxes but also remove one of the federal government’s levers over an industry .

I study and . In my view, the tax implications of rescheduling marijuana alone are likely to have consequences that go far beyond the tax bill that businesses pay.

Why marijuana businesses are taxed differently

Under federal law, state-legal marijuana businesses face unique tax burdens.

Most businesses can deduct, or write off, . For example, businesses generally can subtract the costs of rent and utilities from the income they earn. But that’s that deal in Schedule I and II controlled substances, including marijuana.

In effect, legal marijuana businesses pay federal income tax on their rather than their net income like other companies.

Imagine a business with US$100,000 of income before expenses and $80,000 of . Ordinarily, the business would pay $4,200 in tax on $20,000 of net income, assuming a . The business’s cash profits would be $15,800 for the year – a healthy .

If this hypothetical business legally sold marijuana, of the Internal Revenue Code would deny any income tax deductions for the business’s $80,000 in expenses. This rule applies even though the business’s expenses are real costs, and even though the business is legal under state law. In this scenario, the business would owe $21,000 in tax on $100,000 of gross income. This would put the business in the red for the year, with a negative cash flow of $1,000 and a negative net profit margin.

For many legal marijuana businesses, making the math work isn’t a hypothetical challenge. Indeed, some enterprises have reported real-world effective tax rates – the top statutory rate for individuals.

This state of affairs traces to two court decisions handed down more than five decades apart. In 1927, the Supreme Court held that remained subject to tax – a decision later leveraged in mob boss Al Capone’s on criminal tax evasion charges. Then, in 1981, the U.S. Tax Court affirmed that illegal activities were after deductions, like legal businesses. Lawmakers objected, and Congress the in response.

Essentially, the move gave drug traffickers a : face civil or criminal penalties for failing to properly report their income, or pay punishingly high effective tax rates. Just as Treasury Department enforcers used tax law to during Prohibition, tax law’s dual disincentives .

Because Section 280E applies only to Schedule I and II substances, rescheduling to Schedule III would tax legal marijuana businesses like other businesses. , this would better align federal tax law with of marijuana. In effect, rescheduling could for the marijuana industry, according to one estimate.

How the tax code quietly regulates marijuana

A cannabis store in New York City.

Despite these high effective tax rates, the state-legal marijuana industry has and . Tax law, however, has shaped how this industry operates.

In this way, tax law serves as a form of quiet regulation – not directly, by setting licensing standards or policing potency, but indirectly. If marijuana were rescheduled, the federal government would give up this mechanism for indirect regulation.

As it currently stands, Section 280E has three important regulatory effects:

First, Section 280E limits businesses’ financing options. Like other enterprises, legal marijuana businesses need capital to grow. By constraining after-tax profits and cash flow, the status quo makes it harder for these marijuana businesses to finance growth internally using their own money from operations, known as “.” This tax-induced capital scarcity may help explain mature legal marijuana industries’ . After taxes, there’s simply very little cash to reinvest.

This constraint pushes legal marijuana businesses to finance growth through . Because marijuana businesses remain illegal under federal law, and may treat otherwise legal businesses as off-limits or high-risk. These businesses for loans, specialized leasing arrangements and equity investments. Given the federal restrictions on marijuana, private investors tend to , often insisting on protective covenants and operational restrictions.

Second, Section 280E encourages legal marijuana businesses to isolate activities that “” from marijuana production and sales. If the nonmarijuana activities are – legally, spatially and operationally – they may be able to claim business expense deductions that direct marijuana-related activities cannot.

Legal marijuana businesses have implemented these separate structures for activities from back-office support and real estate management to licensing for branding and merchandise. In addition to affecting tax burdens, these structures require ongoing operational oversight by outside parties – lawyers, accountants and other providers – and of marijuana-touching activities away from other activities.

Finally, Section 280E raises the stakes of accurately accounting for the marijuana sold by these businesses. Courts that legal marijuana businesses can reduce their gross income by the “” – the direct production and acquisition costs of inventory. Even under Section 280E, these businesses can subtract the costs to grow, process and package marijuana from their sales revenue. As a result, these businesses direct production costs throughout their supply chains.

This supply chain management offers another pathway for indirect regulation. Many state regulatory regimes already . But Section 280E adds a financial reward for . Although some of this tax compliance work is , public policy may favor multiple forms of regulation by multiple stakeholders – a diversity of oversight for an industry where can have .

Federal tax rules for state-legal marijuana businesses operate as a form of indirect, or quiet, regulation: a national overlay that complements – and amplifies – state regulatory regimes. Rescheduling would remove this federal overlay by taking marijuana out of Section 280E’s reach.

From this perspective, the debate over rescheduling is about more than just tax normalization versus public health risks. Rescheduling raises bigger questions of institutional design: whether the federal government should yield one of its most practical points of leverage over the legal marijuana industry – and, if so, whether another regulatory mechanism should replace it.