California Increases Cannabis Tax to 19% Amidst Industry Struggles

Categories: California Business NewsCalifornia News

A tax increase notice affecting the California cannabis market.

News Summary

California is set to increase its cannabis excise tax from 15% to 19% on July 1, following a decline in revenue from the legal cannabis market. This tax hike poses significant challenges for legal cannabis businesses as they compete against unlicensed operations. Despite generating $595 million in excise tax revenue in 2024, industry leaders warn that ongoing financial difficulties could threaten the viability of the legal market. Legislative efforts are being made to block this tax increase amidst growing industry concerns.

California is set to increase its cannabis excise tax from 15% to 19% starting July 1, marking the highest rate permissible under state law. The California Department of Tax and Fee Administration announced this tax hike during a recent cannabis advisory meeting, resulting in a 26% increase.

The adjustment follows a mandate embedded in state law, which requires an increase in the cannabis tax rate if excise revenue sees a decline. California’s legal cannabis market has faced significant financial challenges, with many businesses shuttering their doors due to decreasing revenue. Governor Gavin Newsom’s administration proposed this tax increase as a response to the ongoing struggles the legal cannabis industry endures.

This significant tax rollback stems from a law passed in 2022, which eliminated the cultivation tax. However, it simultaneously stipulated that tax rates must rise in the event of revenue drops. Industry experts believe this increase poses serious challenges for legal cannabis businesses striving to remain competitive against the illegal market.

Jerred Kiloh, who serves as president of the United Cannabis Business Association, indicated that the rise in tax rates will hinder the ability of legal stores to compete effectively with their illegal counterparts. The cannabis industry has long faced obstacles due to steep taxes, burdensome regulations, and competition from unlicensed growers who do not bear the same fiscal responsibilities. A recent study revealed that a majority of cannabis users still procure their products from the illegal market.

This tax increase has prompted some immediate responses, including Assemblymember Matt Haney’s introduction of Assembly Bill 564. This bill aims to obstruct the tax hike, and it has made progress through the state Legislature. Many industry advocates, including figures like Amy O’Gorman Jenkins, have expressed concerns that the current tax rate is already excessive, placing undue stress on the financial viability of legal cannabis operations.

It is worth noting that California’s new tax structure will likely dissuade further investments in legal cannabis enterprises and diminish interest in obtaining cannabis licenses. As the cannabis industry grapples with mounting pressures, data suggests that around 63% of cannabis consumed in the state originates from unlicensed sources, underlining the ongoing struggle within the legal framework.

Despite generating an impressive $595 million from the cannabis excise tax in 2024, industry leaders warn that the continuous financial hardships could jeopardize the existence of the legal market. The California Department of Tax and Fee Administration stated that their hands are tied by law, necessitating the tax raise unless legislative amendments are introduced and passed.

This new tax will substantially influence the total purchase prices consumers face at dispensaries, inevitably raising the costs associated with legal cannabis products. As California moves forward, the impending tax increase poses critical questions about the long-term sustainability of the state’s legal cannabis sector amidst an increasingly competitive and unregulated marketplace.