News Summary

California will raise its cannabis excise tax from 15% to 19% starting July 1, the highest allowable rate per state law. This 26% increase is a response to declining tax revenue from legal cannabis businesses, as many establishments have shut down. Industry advocates express concern that the tax hike will worsen competition with the illegal market, which remains prevalent. Assembly Bill 564 has been introduced to halt the tax increase amid fears that it could devastate the legal cannabis sector in the state.

California is set to increase its cannabis excise tax from 15% to 19% on July 1, marking the highest allowable rate under state law. The California Department of Tax and Fee Administration announced this significant tax hike during a recent cannabis advisory meeting. This decision was made in accordance with state laws that require the cannabis tax rate to be elevated if excise revenue experiences a decline.

The tax increase, which represents a 26% hike, is part of Governor Gavin Newsom’s administration’s efforts to address the financial struggles faced by the state’s legal cannabis industry. Reports indicate that revenue from legally operating cannabis businesses has decreased significantly over time, leading to the closure of thousands of these establishments.

The hike is a corollary of a 2022 law enacted by Governor Newsom, which abolished the cultivation tax. However, this law stipulated that increases in cannabis tax rates must occur if revenue falls, prompting the upcoming increase. The cannabis sector has been grappling with high tax burdens, stringent regulations, and stiff competition from the illicit market, which evades cannabis taxes.

Industry studies indicate that a significant proportion of cannabis users continue to purchase products from the illegal market. State data reveals that approximately 63% of cannabis consumed in California originates from unlicensed production sources. This reality raises concerns about the future viability of legal cannabis businesses, particularly given the financial hurdles imposed by the latest tax increase.

In response to the impending tax hike, San Francisco Assemblymember Matt Haney has introduced Assembly Bill 564, aimed at stopping the tax increment. This legislation has been progressing through the state’s legislative process, reflecting growing unease among operators within the legal cannabis sector about the sustainability of their businesses under the increased tax regime.

Leaders in the cannabis industry, including representatives from the United Cannabis Business Association, have voiced concerns that the tax increase will hamper competition between legal storefronts and illegal suppliers. With legal cannabis already facing high operational expenses and wavering consumer interest, the conversation around tax structures continues to gain urgency.

The potential consequences of the tax hike extend beyond immediate financial challenges for cannabis businesses. Industry experts warn that this change could further discourage investments in legal cannabis operations and lead to diminished demand for cannabis licenses. The alarming trend of falling revenue coupled with rising taxes could potentially collapse the legal market in California, posing a threat to both businesses and state tax revenues.

Despite generating significant income for the state through cannabis taxation—reports suggest $595 million in excise tax revenues for 2024—advocates for the industry contend that ongoing financial pressures threaten the very existence of legally operated establishments. The California Department of Tax and Fee Administration has reiterated its position, asserting that it is legally obligated to raise the cannabis excise tax unless there are amendments to current legislation.

As the implementation date for the increased tax looms, consumers can expect an uptick in prices at dispensaries. The anticipated rise in costs will affect the total purchase price consumers face, further complicating the landscape for both buyers and sellers in California’s cannabis market. The repercussions of this tax change are expected to resonate widely, influencing not only the operational dynamics of cannabis businesses but also consumer behavior and market trends in the broader context of California’s economy.