A BILL IN the California Legislature seeks to prevent a scheduled increase in the state’s cannabis excise tax, which is set to jump from 15% to 19% in July. The increase stems from a 2022 compromise that eliminated the state’s cannabis cultivation tax but allowed for an adjustment to the excise tax to offset lost revenue.
AB 564, authored by Assemblymember Matt Haney (D-San Francisco), would repeal the automatic excise tax increase, effectively freezing the rate at 15%. Haney and other industry advocates argue that raising taxes on cannabis businesses could push even more operators toward insolvency or the illicit market, exacerbating an already dire economic situation for legal dispensaries.
The tradeoff that led to the tax hike
The pending increase is a direct result of AB 195, which in 2022 eliminated California’s burdensome $161-per-pound cultivation tax — a move celebrated by many operators. However, that decision came with a tradeoff: State law required that the excise tax be adjusted upward to recoup the lost revenue. At the time, the cultivation tax contributed roughly $165 million annually to state coffers.
The planned excise tax increase is intended to maintain funding for various state programs that rely on cannabis tax revenue. These include youth substance-use prevention, environmental clean-up efforts, and public safety initiatives, which require a baseline of $670 million annually.
However, Governor Gavin Newsom’s 2025-26 budget estimates only $468.2 million in cannabis tax revenue for the fiscal year, creating a $200 million shortfall that is driving the proposed hike.
Impact on industry
California’s legal cannabis market has faced mounting economic pressures, including declining prices and increasing competition from the unlicensed market. Total statewide sales have shrunk 13% since 2021, according to the California Department of Cannabis Control.
Industry leaders warn that increasing the excise tax would make it even harder for them to compete with the state’s estimated $10 billion illicit market.
In 2024, California’s 1,225 active dispensaries collectively sold $4.66 billion in cannabis, generating about $600,000 per store in excise tax obligations.
If the rate jumps to 19%, the average dispensary would pay an extra $160,000 annually — on top of state sales tax (ranging from 7.25% to 10.75%) and various local levies. For larger businesses with multiple locations, the impact is even greater.
The bill aims to prevent further erosion of the regulated industry. That said, whether AB 564 can gain enough support in the Legislature to halt the tax increase remains to be seen.