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Starting July 1, California will raise its cannabis excise tax from 15% to 19%, marking a 26% increase. This decision comes amid financial struggles in the state’s legal cannabis market, including declining sales and business closures. Critics argue that the tax hike will make it harder for legal dispensaries to compete against illicit markets. Assembly Bill 564 has been introduced to halt this increase, as stakeholders worry that higher prices will drive consumers to unlicensed sources, jeopardizing the legal market’s existence.

California is set to raise its cannabis excise tax from 15% to 19% starting July 1. This represents a 26% increase and is the highest tax rate allowed by state law. The announcement was made by the California Department of Tax and Fee Administration during a recent cannabis advisory meeting, underscoring the ongoing challenges faced by the state’s legal cannabis market.

The new tax rate comes as the cannabis industry in California grapples with substantial financial difficulties. Revenue generated from legal cannabis sales has significantly declined, leading to the closure of thousands of businesses. The tax increase is a result of existing state law that mandates a rise in the cannabis excise tax when tax revenue falls below expected levels.

This law was established following a 2022 legislative change signed by Governor Gavin Newsom, which eliminated the cultivation tax but requires higher cannabis tax rates in response to decreased revenue. Critics of the tax increase highlight its potential to exacerbate the already challenging environment for legal cannabis providers, which struggle against stiff competition from the illegal market.

Industry leaders express concern that the rising tax rate will further hinder the ability of legal dispensaries to compete against illicit cannabis vendors, who do not pay taxes and can offer lower prices. A recent study indicates that a significant portion of cannabis consumers continues to buy products from unlicensed sources, with estimates suggesting that around 63% of cannabis consumed in California is sourced from illegal production.

San Francisco Assemblymember Matt Haney has introduced Assembly Bill 564, aiming to halt the tax hike. The bill is currently making its way through the legislative process, reflecting the growing backlash against the tax increase among lawmakers and industry representatives. Many in the cannabis sector, including those in leadership positions, deem the current tax rate already burdensome and express fears that necessary investments in businesses will diminish with the impending tax hike.

The impact of the new excise tax rate will likely be felt directly by consumers, as the total purchase prices at dispensaries are expected to significantly increase. This escalation in costs may discourage consumer spending in the legal market further and reduce the demand for cannabis licenses.

Despite generating substantial revenue for the state – approximately $595 million reported in 2024 from cannabis excise taxes – continued economic struggles in the legal cannabis market raise alarms among industry advocates. They warn that without adjustments or support measures, the sector may spiral into further decline, potentially jeopardizing the existence of the legal cannabis market in California.

The California Department of Tax and Fee Administration highlights that the tax increase is mandated by law unless changes are made via legislative intervention. As the July 1 deadline approaches, industry stakeholders and consumers alike remain anxious about the future of legal cannabis sales in one of the largest markets in the United States.

California to Increase Cannabis Excise Tax to 19%

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Author: HERE Anaheim