On September 22, 2025, California Governor Gavin Newsom signed AB 564 into law, a watershed event for the state’s legal cannabis industry. The bill, authored and championed by Assemblymember Matt Haney, reverses an automatic 25% increase in the cannabis excise tax and freezes the rate at 15% until July 2028. Coupled with increasingly effective enforcement actions against illegal producers, the measure immediately lifts a heavy burden from licensed operators, enhances competitiveness against illicit suppliers, and signals a more sustainable future for the nation’s largest regulated cannabis market.
These recent developments bode well for companies operating legally in the state. Though many of California’s most prominent brands are privately owned, some public companies offer investors a way to capitalize on the potential of the market-boosting measures. LEEF Brands Inc. (CSE: LEEF) (OTC: LEEEF) is a great example. LEEF is one of California’s leading extractors, selling its concentrates and oils to many of the top brands operating there.
LEEF is addressing about 48% of the state’s $4.2 billion legal market. The addressable market for LEEF’s extraction business includes vapes, edibles, concentrates, and beverages. The rest of the market consists of flower and pre-roll sales. The company has also recently opened its doors in New York, having pre-sold all of its 2025 inventory shortly after production began. New York is projected to top $1.5 billion in sales this year, in just its third full year of legal cannabis activities.
Follow along as we discuss the potential benefits for companies like LEEF Brands.
Decoding the New Law: From Crisis to Relief
The context for AB 564 is the ongoing struggle of California’s legal cannabis sector—once hailed as a model, but recently battered by high taxes, regulatory complexity, oversupply, and declining prices. In 2022, California eliminated its cultivation tax, which had squeezed growers amid falling wholesale prices. However, to offset lost revenue, the excise tax on consumers was slated to climb from 15% to 19% in 2025, with further increases pegged to inflation.
Evidence mounted that tax hikes were counterproductive: legal cannabis became less affordable than illicit products, driving consumers back to the black market and causing legal sales (and jobs) to shrink. AB 564’s passage was decisive—winning overwhelming bipartisan support (39-1 in the Senate; 74-0 in the Assembly). With Newsom’s signature, the excise tax rate is rolled back to 15% as of October 1, eliminating the 25% increase. If not for this relief, many small businesses faced extinction; thousands of jobs had already disappeared since 2022.
Impact on Legal Providers and the Market
- Restoring Competitiveness vs. Illicit Operators
- Lowering the tax rate immediately makes legal products more price-competitive, improving consumer access to safe, tested cannabis while undercutting untaxed illicit operations.
- Licensed retailers benefit from increased traffic as price-sensitive buyers have a stronger incentive to purchase legally.
- Small Business and Job Protection
- The bill stabilizes the operating environment, helping small and mid-sized businesses stay afloat and reducing further industry job losses. Stakeholders—including the California Cannabis Operators Association—have praised the legislation as “smart policy that grows revenue by keeping the legal market viable”.
- Encouragement of Compliance and Quality
- Licensed producers are incentivized to continue environmental stewardship and labor practices, supporting the original intent of Proposition 64: safe, regulated, and accessible cannabis generating sustainable tax revenue for the state.
- Support for High-Quality and Local Producers
- Growers producing higher-quality, higher-priced products (often hit hardest by excess taxes) stand to gain most from the tax rollback, regaining lost margins and demand.
Investor Takeaways
For investors, AB 564 signals a renewed commitment to a viable legal cannabis industry in California, with three themes to watch:
- Margin Rebound: Legal operators should begin to see improved profitability and stability as tax relief takes effect.
- Market Share Gains: Licensed producers and retailers are positioned for volume growth if price competitiveness draws consumers from illicit channels.
- Regulatory Bets: Forward-looking investors may find opportunity in distressed assets or consolidation plays, anticipating a shift in industry fortunes now that regulatory headwinds have eased.
California’s action could reverberate across the U.S. cannabis sector, prompting other states to reconsider excessive taxation. As the legal market regains its footing, providers and investors finally have grounds for cautious optimism about long-term growth—and about fulfilling voters’ original vision for safe, regulated cannabis access.
For LEEF Brands, these developments could have a compounding effect on the company’s current efforts to increase margins and achieve consistent and significant profitability. The company recently harvested its first crop from its wholly owned Salisbury Canyon Ranch cannabis farm in Santa Barbara County. With 65 acres currently in production and 187 acres anticipated by 2027, the Ranch comprises one of the world’s largest outdoor cannabis sites.
LEEF anticipates that the vertical integration of production from the Salisbury Canyon Ranch will add approximately 19% to its gross margin when compared with the current model of acquiring raw plant material from other growers. The company currently operates with gross margins of approximately 35%. Many similar companies in the industry achieve gross margins in the 40-50% range, so the new production facility will bring LEEF up to, and potentially exceed, its competitors in terms of margins.
It’s an exciting time in the legal cannabis industry. The Trump administration is considering rescheduling the drug from Schedule 1 to Schedule 3, a move that would provide tremendous relief across the nation for the legal market. California is actively reinforcing its commitment to supporting a healthy industry in the world’s largest market. And companies like LEEF Brands stand ready to benefit. Stay tuned.
