California’s cannabis industry stands at a pivotal juncture. Effective July 1, 2025, the state will implement a significant increase in the cannabis excise tax, raising it from 15% to 19%. This adjustment, mandated by legislation signed in 2022, aims to compensate for the elimination of the cultivation tax and to address declining tax revenues from the legal cannabis market.
Understanding the Tax Increase
The California Department of Tax and Fee Administration (CDTFA) announced this tax hike as part of a biennial review process. The 2022 law that eliminated the cultivation tax included a provision requiring the excise tax to be adjusted to ensure revenue neutrality. With cannabis tax revenues falling short of projections, the state is compelled to raise the excise tax to the maximum allowed rate of 19% .
Impact on the Legal Cannabis Market
Industry stakeholders express deep concerns about the ramifications of this tax increase. Jerred Kiloh, president of the United Cannabis Business Association, warns that the higher tax burden will exacerbate the challenges faced by legal cannabis businesses, making it increasingly difficult to compete with the untaxed illicit market. He predicts a surge in business closures and a decline in investment within the legal sector .
Amy O’Gorman Jenkins, executive director of the California Cannabis Operators Association, echoes these sentiments, stating that many businesses are already struggling to meet the current 15% tax obligations. She urges the legislature and administration to freeze the tax at 15% to prevent further erosion of the regulated market .
Legislative Efforts to Halt the Increase
In response to industry concerns, Assemblymember Matt Haney introduced Assembly Bill 564, aiming to maintain the excise tax at 15%. The bill has garnered bipartisan support, passing unanimously in a recent committee vote. However, with the July 1 implementation date approaching, time is of the essence for the legislature to act .
Economic Context and Revenue Considerations
The state’s decision to raise the excise tax comes amid a broader economic downturn in the legal cannabis market. Tax revenues have declined significantly, with the state collecting $463 million in cannabis excise taxes through the first three quarters of 2024, down from over $625 million in 2023 . The Department of Cannabis Control also faces a $23 million budget deficit, prompting considerations of increased licensing fees, further straining the industry .
Comparative Tax Burde
California’s cannabis taxation structure is among the most burdensome in the nation. When combined with state sales taxes and local levies, consumers can face total tax rates approaching 48% on cannabis products. This high tax burden drives consumers toward the illicit market, undermining the state’s regulatory objectives and reducing legal market participation .
Local Government Responses
Recognizing the detrimental effects of high taxation, several local governments have taken steps to alleviate the burden on cannabis businesses. Cities like Palm Springs and Desert Hot Springs have reduced local cannabis taxes to support struggling businesses. These measures aim to sustain the legal market and prevent further closures .
The Path Forward
As the July 1 deadline approaches, the future of California’s legal cannabis industry hangs in the balance. Stakeholders advocate for legislative intervention to prevent the tax increase and to implement policies that support the viability of the regulated market. Without such measures, the state risks further contraction of the legal cannabis sector and a resurgence of the illicit market.
The coming weeks will be critical in determining whether California can recalibrate its cannabis taxation policies to foster a sustainable and competitive legal market.
