California reduces cannabis taxes to support struggling industry
California has officially reduced its cannabis taxes in an effort to boost the state's struggling legal cannabis market and improve its competitiveness against the illicit market. Governor Gavin Newsom signed Assembly Bill 564 into law, reversing a planned tax hike and offering relief to licensed businesses in the industry.
The legislation, authored by Assemblymember Matt Haney (D-San Francisco), reduces the retail excise tax on cannabis sales from a scheduled 19% back to 15%. This adjustment effectively halts a tax increase that was set to take effect in the 2025–26 fiscal year. The new tax rate will remain in place from October 1, 2025, to June 30, 2028, ensuring temporary financial stability for legal operators. Medical cannabis will continue to be exempt from sales and use taxes.
"We’re rolling back this cannabis tax hike so the legal market can continue to grow, consumers can access safe products, and our local communities see the benefits", said Governor Newsom in a statement.
Supporting the legal market amid illicit competition
California’s legal cannabis industry has faced significant challenges since the state legalized recreational use in 2016. High tax rates, combined with declining wholesale prices, have made it difficult for legal businesses to compete with the untaxed and unregulated illicit market. While about 11.4 million pounds of illegal cannabis are produced in California annually, licensed operators only produced 1.4 million pounds in 2024, according to a report by ERA Economics.
Currently, only 38% of cannabis consumed in California is sourced from legal outlets, further highlighting the dominance of the illegal market. To combat this, the state has increased enforcement efforts. Since the launch of the Unified Cannabis Enforcement Taskforce (UCETF) in 2022, authorities have seized over $2.8 billion worth of unlicensed cannabis products, including $534 million in 2024 alone. Officials say these efforts have also led to the destruction of more than 317 tons of illegal cannabis, valued at approximately $890 million.
Assemblymember Matt Haney emphasized the importance of supporting licensed businesses as part of the state's broader strategy to curb illicit activity. "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", she said in a statement.
Financial trade-offs and future adjustments
The decision to reduce cannabis taxes will have financial repercussions for the state. California is expected to collect $100 million less in excise tax revenue this year compared to the $680 million peak reached in 2021. However, proponents of the new law argue that the tax relief will create a more sustainable environment for legal operators, helping secure jobs and keeping small businesses afloat.
The state’s cannabis tax structure has undergone several revisions since 2016. In 2022, California eliminated the cultivation tax to ease financial pressure on licensed growers. A corresponding law allowed the state to adjust cannabis sales tax rates every two years to account for revenue fluctuations. While the latest rollback temporarily stabilizes the tax rate at 15%, further adjustments could happen after June 30, 2028.
The move reflects California's ongoing efforts to strike a balance between supporting its legal cannabis industry, ensuring public access to safe products, and addressing the financial impact of policy changes. For now, the state's focus remains on leveling the playing field for legal businesses and reducing the influence of the illicit market.