California Governor Newsom Signs AB 564, Rolling Back Cannabis Tax Hike to Support Struggling Industry
SACRAMENTO, CA – Governor Gavin Newsom has signed Assembly Bill 564 (AB 564), a landmark piece of legislation that rolls back a recent 25% increase to California’s cannabis excise tax. The bill, championed by Assemblymember Matt Haney, aims to revitalize the state’s struggling legal cannabis industry by reinstating the excise tax rate at 15%, effective October 1, 2025, and maintaining it through at least June 30, 2028. This move reverses a rate hike to 19% that took effect on July 1, 2025.
The legislation comes at a critical juncture for California’s cannabis market, which has faced significant headwinds, including declining sales, a contraction in active business licenses, and intense competition from the untaxed illicit market. Industry advocates and business owners have widely hailed the tax reduction as a necessary measure to provide immediate financial relief and foster long-term stability.
Addressing Industry Challenges Through Tax Reform
California’s legal cannabis market, the largest in the world, has been grappling with a complex web of challenges since legalization. High taxes, combined with other operational costs, have made it exceedingly difficult for licensed businesses to compete with the lower prices offered by illegal operators. Data indicates that in the first quarter of 2025, taxable sales fell to their lowest point in five years, an 11% decrease compared to the previous year, representing the largest year-over-year drop in the history of California’s legal cannabis sales. This market contraction has led to thousands of businesses closing and a significant loss of active licenses over the past two years.
Assemblymember Haney stated that AB 564 is crucial for leveling the playing field, protecting jobs, and ensuring the legal cannabis market can grow and thrive as voters intended. “California’s cannabis economy can bring enormous benefits to our state, but only if our legal industry is given a fair chance to compete against the untaxed and unregulated illegal market,” Haney remarked. The bill’s passage, with overwhelming bipartisan support in both the Assembly and Senate, underscores the shared recognition of the industry’s plight.
A Dual Approach: Tax Relief and Enforcement
Governor Newsom emphasized that the tax rollback is intended to allow the legal market to grow, ensure consumers have access to safe products, and benefit local communities. Beyond tax relief, the administration is also bolstering enforcement efforts against illegal operators. Cannabis tax revenue is being dedicated to fund civil and criminal enforcement activities, reducing the burden on legal businesses while targeting illicit operations. Furthermore, grant eligibility has been expanded to local jurisdictions to enhance local enforcement capabilities against illegal cannabis activity.
Concerns Over Funding for Social Programs
While the cannabis industry celebrates the tax cut, some public health advocates have voiced concerns. Dr. Lynn Silver, director of the Public Health Institute, described the move as a “massive tax giveaway to Big Cannabis,” warning that it could permanently reduce funding for critical programs such as childcare, youth substance use prevention, environmental restoration, and law enforcement. These programs were originally intended to be supported by cannabis tax revenues as outlined in Proposition 64. Critics estimate that the tax reduction could lead to over $1 billion in lost state revenue over seven years, potentially impacting essential services.
The Path Forward
The enactment of AB 564 signifies a strategic effort by the state to rebalance its approach to cannabis policy. By addressing the tax burden, California aims to foster a more competitive and sustainable legal market, thereby increasing overall tax revenues in the long run. The Department of Cannabis Control and the Department of Tax and Fee Administration are tasked with adjusting tax rates in the future and reporting on the economic impacts, ensuring a data-driven approach to policy. This development is a significant event in the ongoing narrative of California’s cannabis industry, reflecting a continued effort to navigate the complexities of legalization and its economic and social implications. This news is particularly relevant for those tracking trending cannabis news and policy events.
