California’s Cannabis Excise Tax Set to Increase
California’s Cannabis Excise Tax Set to Increase: Industry Concerns Grow
California’s cannabis industry is bracing for a significant excise tax increase, set to take effect on July 1, 2025. The statewide cannabis excise tax on dispensary sales will rise from 15% to 19%, a 27% increase, adding to existing state and local taxes. In cities like Los Angeles, where additional local taxes apply, retailers could face an effective tax rate of 34.5% on cannabis products.
Amid growing industry frustration, California Department of Cannabis Control (DCC) Director Nicole Elliott took to social media to clarify that Governor Gavin Newsom is not directly responsible for the tax increase. In a March 24 post on X (formerly Twitter), Elliott addressed comedian and cannabis entrepreneur Bill Maher, suggesting that the tax hike is happening “by force of law,” not by Newsom’s directive.
However, the law in question, Assembly Bill 195 (AB 195)—which set the stage for the increase—was backed by Newsom and passed as part of California’s 2022 state budget. While AB 195 eliminated the state’s cultivation tax and streamlined excise tax collection at the retail level, it also included a provision to raise the excise tax to 19% if certain revenue conditions were unmet.
Newsom’s 2022 proposal aimed to maintain “revenue neutrality” after removing the state’s $161-per-pound cultivation tax. The compromise involved a potential excise tax hike to fund Allocation 3 programs, which support:
– Childcare and youth programs
– Environmental and conservation initiatives
– Law enforcement and justice efforts
– Substance abuse prevention and treatment
Currently, Allocation 3 recipients hold a $600 million surplus, yet the legal cannabis market is shrinking. California’s dispensary sales dropped from $5.35 billion in 2021 to $4.67 billion in 2024, while tax defaults among dispensaries rose to 15%.
Industry Pushback and Legislative Efforts
In response, Assembly Member Matt Haney (D-San Francisco) introduced AB 56 on February 12, 2025, to block the tax hike. However, the bill has yet to gain traction. California NORML has challenged Newsom to support the legislation, arguing that raising taxes will further destabilize an already struggling legal market and push consumers toward cheaper, untaxed cannabis from the illicit market.
A March 2024 report from ERA Economics, commissioned by the DCC, highlights the ongoing dominance of the unlicensed market:
– 38% of cannabis consumed in 2024 came from licensed businesses, up from 33% in 2020.
– California produced 1.4 million pounds of licensed cannabis in 2024 but an estimated 11.4 million pounds of unlicensed cannabis.
– An estimated 9 million pounds of illicit cannabis leaves California annually, fueling out-of-state black markets.
While Newsom’s Unified Cannabis Enforcement Task Force seized $534 million worth of illicit cannabis in 2024, this represents only about 1.5% of total unlicensed production.
With July 1, 2025, approaching, industry leaders and advocates are pushing for legislative action to prevent the tax hike. If Newsom appears on Real Time with Bill Maher, the TV host may press him for answers on whether he will support AB 564 and reconsider the increase. Meanwhile, cannabis businesses are left grappling with rising costs, declining sales, and an illicit market that continues to thrive.
Stay tuned as California’s cannabis tax battle unfolds.