In a significant move aimed at revitalizing California’s legal cannabis market, Governor Gavin Newsom has signed Assembly Bill 564 (AB 564), legislation that reverses a recent increase in the state’s cannabis excise tax. The new law, effective October 1, 2025, will reduce the state’s cannabis excise tax rate from 19% back down to 15% and maintain it at that level through at least June 30, 2028. This decision signals a strategic shift to support licensed businesses and foster healthier growth within the industry, a development widely considered trending news within the cannabis sector.
The Legislative Action: Rolling Back the Tax Burden
Governor Newsom’s signature on AB 564 effectively rolls back a 25% tax increase on the legal cannabis industry that had taken effect on July 1, 2025. This earlier increase had raised the excise tax from 15% to 19%. The legislation, authored by Assemblymember Matt Haney (D-San Francisco), specifically reinstates the 15% excise tax rate, providing immediate relief to businesses and consumers. The tax is set to remain at 15% until mid-2028, after which the California Department of Cannabis Control will review and potentially adjust the rate every two years, ensuring it does not exceed 19%. This legislative maneuver is designed to address immediate financial pressures while establishing a framework for future revenue management.
Context: A Struggling Industry in Need of Relief
The California cannabis industry has faced considerable headwinds since its inception, grappling with a complex web of high taxes, regulatory hurdles, and intense competition from the illicit market. Despite being the largest legal cannabis market globally, licensed operators have contended with declining sales and an increasing number of business closures. Reports indicate that the untaxed, illicit market accounts for over 60% of statewide cannabis sales, significantly undermining the state’s efforts to transition consumers to regulated sources. The recent excise tax hike, implemented to offset the discontinued cultivation tax, was seen by many in the industry as a further blow, exacerbating existing challenges and making legal cannabis less competitive.
Rationale: Leveling the Playing Field and Protecting Jobs
Proponents of AB 564 argue that the tax reduction is crucial for creating a more equitable and sustainable legal cannabis market. Governor Newsom stated that the rollback is intended “so the legal market can continue to grow, consumers can access safe products, and our local communities see the benefits”. Assemblymember Haney echoed this sentiment, emphasizing the need to “level the playing field” and ensure the legal industry is given a “fair chance to compete against the untaxed and unregulated illegal market”. The legislation aims to protect California jobs, support small businesses, and allow the legal cannabis market to thrive as voters originally intended.
Industry Reaction and Economic Implications
The cannabis industry largely celebrated the signing of AB 564, viewing it as a vital lifeline. Leaders within the sector expressed optimism that the tax relief will help stabilize businesses and encourage consumers to return to legal dispensaries. However, the decision has also drawn criticism from public health advocates. Dr. Lynn Silver of the Public Health Institute voiced concerns that the tax cut represents a “massive tax giveaway to Big Cannabis” and will permanently reduce funding for crucial programs such as childcare, youth substance use prevention, environmental restoration, and law enforcement. The projected annual revenue shortfall from this tax reduction is estimated to be between $200-250 million, which may necessitate funding from the state’s general fund.
Enforcement Efforts and Future Outlook
In conjunction with the tax adjustments, the administration has also bolstered enforcement efforts against illegal cannabis operations, dedicating cannabis tax revenue to fund civil and criminal enforcement activities. This multi-pronged approach aims to dismantle the illicit market while supporting the legitimate industry. While AB 564 offers immediate relief, the overall tax burden on legal cannabis, when combined with state sales and local taxes, can still exceed 30% in many jurisdictions. This ongoing high tax environment continues to be a challenge for the evolving cannabis lifestyle and business landscape. The industry’s future success will likely depend on continued policy adjustments, effective enforcement, and the ability to foster robust consumer confidence in the legal market.
