Sacramento, California – The landscape of California’s legal cannabis industry is undergoing significant shifts following recent announcements tied to the state budget, impacting both taxation and enforcement strategies. As of July 2, 2025, the state’s cannabis excise tax is set to increase, a move that will add to the operational costs for businesses within the regulated market.
Adding to the fiscal changes, the Department of Cannabis Control (DCC) has unveiled a crucial change in how enforcement efforts targeting the illicit market will be funded. Historically, these essential operations were primarily supported by license fees paid by legal operators. However, under the proposed structure outlined in the state budget, funding for combating unlicensed activities will transition to come directly from the state’s cannabis tax fund.
Shifting the Burden of Enforcement
This pivot in funding source was a change advocated by the DCC itself, aimed at establishing what the department described as a more equitable funding structure. The rationale behind this shift recognizes illicit market enforcement not solely as a burden on licensed businesses but as a shared responsibility crucial for the health and safety of the entire state and the integrity of the legal market.
The move is designed to alleviate some financial pressure on licensees while redirecting tax revenues—generated by the very market enforcement aims to protect—towards this critical function. Supporters argue that this creates a more sustainable model, tying the resources for enforcement directly to the performance and growth of the legal industry.
Strengthening Local Capabilities
The changes embedded within the 2025-2026 state budget go further than just state-level funding. They include significant statutory changes specifically designed to strengthen enforcement against the illicit market at the local level. A key component of this is the authorization for the Board of State and Community Corrections (BSCC) to provide grants.
These grants will be sourced directly from the Cannabis Tax Fund, making state cannabis tax revenues available to a broader group of local governments. The funding is intended to support a range of public safety and community programs, including law enforcement, fire protection, and other initiatives directly tied to the implementation and goals of Proposition 64.
A notable expansion in eligibility criteria for these grants will now allow local governments that authorize retail cannabis sales—whether via storefronts or through delivery services—in small jurisdictions to qualify for funding. This aims to empower smaller communities to address illicit operations within their borders and manage the local impacts of the cannabis industry, provided they have opted into allowing legal retail activity.
Industry Adapts to Rising Costs
In the face of increasing tax burdens and ongoing market pressures, operators within the legal cannabis sector continue to seek ways to enhance efficiency and reduce costs. Cultivators, in particular, are exploring various technological and operational strategies to navigate the challenging economic climate.
The summary highlights that cannabis cultivators are actively seeking cost-cutting strategies. This includes investing in automation, such as implementing automating smart irrigation systems and utilizing energy-efficient lighting to reduce utility expenses. Precise nutrient management is another area where automation and careful control are being employed to minimize waste and optimize plant health with fewer resources.
The overarching goal for many cultivators is to minimize labor expenses, which are consistently cited as the biggest expense for cultivation facilities. By automating routine tasks, companies can potentially reduce the need for large labor forces.
Beyond technology, some companies are also adopting lean operational practices and streamlining workflows. Utilizing contractors for seasonal work is another strategy mentioned, providing flexibility and potentially reducing overhead associated with full-time employees during peak periods.
These proactive measures reflect the industry’s resilience and determination to adapt to evolving regulatory and economic conditions, including the newly announced tax increases and shifts in enforcement funding.
