In a significant policy shift aimed at bolstering its struggling legal cannabis industry, California has reversed a recent state tax increase. Governor Gavin Newsom signed Assembly Bill 564 (AB 564), which freezes the state’s cannabis excise tax at 15% until 2028, effectively rolling back an increase to 19% that took effect in July 2025. This move is intended to help licensed businesses compete more effectively against the persistent and dominant illicit market, a critical development in the ongoing news surrounding the state’s cannabis sector.
California’s Cannabis Industry Facing Uphill Battle
The legal cannabis market in California, once heralded as the largest in the world, has been grappling with a prolonged downturn. Despite legalization nearly a decade ago, the regulated industry has consistently struggled to outpace the untaxed and unregulated illegal market. Reports indicate that the legal market share of total cannabis consumption has hovered around 40% for several years, with estimates suggesting the illicit market controls upwards of 60% of sales.
This imbalance is largely attributed to a combination of high taxes, complex regulations, and falling wholesale prices, which have made legal cannabis products significantly more expensive for consumers. The recent increase in the state excise tax from 15% to 19% in July 2025 further exacerbated these challenges, adding an additional financial burden on both businesses and consumers. This tax hike was implemented in part to offset revenue losses from the elimination of a cultivation tax in 2022.
The consequence has been a decline in sales and tax revenue for the state, with thousands of businesses facing financial distress, leading to license surrenders and closures. Industry leaders have warned of a potential market collapse if drastic measures were not taken.
AB 564: A Lifeline for the Legal Market
Authored by Assemblymember Matt Haney (D-San Francisco), AB 564 garnered widespread bipartisan support, passing the Assembly with a 74-0 vote and the Senate with a 39-1 vote before being signed into law by Governor Newsom. The legislation aims to provide immediate relief by maintaining the cannabis excise tax rate at 15% through June 30, 2028, and halting any further scheduled increases during this period.
Proponents argue that this tax rollback is crucial for “leveling the playing field,” allowing legal businesses to offer more competitive pricing, thereby encouraging consumers to choose safe, regulated products over those from the illicit market. The stated goals include protecting California jobs, keeping small businesses afloat, ensuring consumer access to tested products, and fostering the long-term growth and viability of the legal cannabis economy.
Industry Support and Lingering Concerns
Major cannabis industry organizations, including the California NORML and the California Cannabis Operators Association, have lauded AB 564 as a vital step toward stabilizing the market. Retailers like Maisha Bahati, CEO of Crystal Nugs dispensary, expressed optimism, stating the cut provides “breathing room” and the potential to pass savings onto customers.
However, the reversal is not without its critics. Some advocacy groups, such as Youth Forward, have voiced concerns that the rollback violates the intent of Proposition 64, which legalized cannabis and established tax revenues for social programs like child development, substance abuse prevention, and environmental restoration. The California Department of Tax and Fee Administration projects a revenue loss of approximately $135 million in the 2025-2026 fiscal year due to this tax reduction, potentially impacting funding for these vital state programs.
Enforcement Against the Illicit Market Continues
Alongside tax relief, the state has also intensified efforts to combat illegal cannabis operations. Governor Newsom’s administration has bolstered enforcement activities, including the Unified Cannabis Enforcement Taskforce (UCETF), which has seized vast quantities of illegal cannabis, valued in the hundreds of millions of dollars. These actions aim to further reduce the prevalence of unregulated products and create a more equitable environment for licensed businesses.
The Path Forward
The passage of AB 564 marks a significant turning point in California’s approach to its legal cannabis industry. By addressing the critical issue of taxation, lawmakers are attempting to foster a more sustainable and competitive market. The success of this policy will be closely watched, as it could serve as a model for other states facing similar challenges in the trending cannabis landscape. The coming years will determine whether this tax adjustment, coupled with ongoing enforcement, is enough to revive California’s once-promising legal cannabis sector and ensure its long-term prosperity.
