SACRAMENTO, Calif. – California’s legal cannabis market saw a significant shift beginning July 1, 2025, as the state’s excise tax on all cannabis products climbed from 15% to 19% [8, 14]. This four-percentage-point increase marks another step in the state’s evolving taxation policy for the industry, bringing added costs to consumers and intensifying financial pressures on businesses.
Understanding the Mandate Behind the Increase
The tax hike is not a discretionary adjustment but rather a legally mandated change [14]. According to regulations, the California Department of Tax and Fee Administration (CDTFA) is required to re-evaluate and potentially adjust the excise tax rate every two years to ensure state revenue goals are met [14]. This particular increase is designed to help offset revenue losses incurred after the state eliminated the cultivation tax in 2022, a move intended to ease the financial burden on growers and make the legal market more competitive against the illicit one [14].
The CDTFA’s calculation for the new rate is based on various factors, including anticipated sales, operating costs of businesses, and the need to generate consistent tax revenue for state coffers. While the state views this as a necessary mechanism to maintain funding streams previously supported by the cultivation tax, the industry and consumers voice considerable apprehension.
Industry Concerns Mount
The legal cannabis industry in California has faced a challenging economic environment, grappling with high taxes, fierce competition from the illicit market, and complex regulatory requirements. The latest excise tax increase is seen by many as a further impediment to growth and stability.
Lauren Nair, the store manager at Off the Charts, a dispensary located in Manteca, California, expressed significant concern over the potential consequences of the tax hike [8]. Nair highlighted the fear that the increased cost at legal dispensaries could push more consumers toward the unregulated, untaxed illegal market, undermining the state’s goals of transitioning consumers to the legal sector and ensuring product safety [8].
“Every time taxes go up, it just makes it harder for us to compete,” Nair stated, echoing a common sentiment among licensed operators. “We’re already dealing with supply chain costs, local taxes, and trying to offer competitive pricing. This 4% jump is substantial and directly impacts the final price customers pay.”
Burden on the Consumer
For everyday consumers, the increase translates directly into higher costs at the point of sale. Miguel Gutierrez, a customer quoted in reports, noted the financial strain the tax hike imposes [8]. Gutierrez pointed out that the increased cannabis tax comes at a time when households are already facing rising costs across various sectors, from groceries to fuel [8].
The additional expense, though seemingly modest on smaller purchases, accumulates. Estimates suggest the 4% excise tax increase will add approximately $5 to the average customer’s purchase, based on an average transaction range of $120 to $140 [8]. While $5 might appear minor, it represents a meaningful percentage increase on top of existing state and local taxes and fees, potentially influencing purchasing decisions for price-sensitive consumers.
Seeking Legislative Relief: The Role of AB 564
Recognizing the industry’s struggles and the potential negative impacts of escalating taxes, legislative efforts are underway to address the issue. Assembly Bill (AB) 564 has been introduced with the specific aim of capping the state’s cannabis excise tax at 15%, effectively rolling back the most recent increase [8].
AB 564 proposes a more stable tax environment for businesses, arguing that a predictable and lower tax rate is essential for the legal market to thrive and effectively compete with illicit operations. The bill’s proponents contend that by making legal cannabis more affordable, the state can boost overall sales volume, potentially leading to higher total tax revenue over time despite a lower rate, while simultaneously enhancing public safety through regulated sales.
However, AB 564 is still navigating the legislative process and requires further review and approval before it could potentially become law [8]. Its passage is not guaranteed, leaving the industry and consumers uncertain about future tax levels.
Navigating the Future
The implementation of the 19% excise tax on July 1, 2025, highlights the ongoing tension in California’s approach to cannabis regulation and taxation. The state is balancing its need for tax revenue with the imperative to foster a robust, legal industry capable of supplanting the black market.
Cannabis businesses are now faced with the difficult decision of absorbing some of the increased cost, passing it fully onto consumers, or finding operational efficiencies elsewhere – all while trying to retain their customer base. Consumers, in turn, must adjust to higher prices or potentially seek alternatives.
The fate of AB 564 remains a critical factor for the industry’s financial health and the state’s ability to manage its legal cannabis market effectively. Until clarity emerges on potential legislative changes, the 19% excise tax stands as the new reality for California’s legal cannabis landscape.
