California’s Cannabis Industry Faces a 27% Excise Tax Increase Beginning July 1, 2025

As the California cannabis industry’s anxieties mount over a forthcoming excise tax increase, the state’s top regulator implied that Gov. Gavin Newsom is not responsible for the hike.

California’s statewide cannabis excise tax levied on dispensary sales will jump from 15% to 19%—representing a 27% increase—starting on July 1, 2025. This is in addition to the state’s sales taxes and local taxes that have some retailers, such as those in Los Angeles, remitting an effective 34.5% combined tax on products sold.

Regulatory Clarifications and Public Perception

In a social media post on March 24, California Department of Cannabis Control (DCC) Director Nicole Elliott asked comedian and HBO political talk show host Bill Maher about his familiarity with the state’s upcoming tax increase ahead of Newsom’s possible appearance on Real Time With Bill Maher.

Although Elliott is correct that the excise tax will increase by force of law, the law she was referring to, Assembly Bill 195, was one that Newsom helped orchestrate. A.B. 195 was attached as a trailer to California’s state budget and signed by Newsom in June 2022.

Legislative Background and Industry Concerns

As part of Newsom’s proposed budget revision in May 2022, he called for eliminating the state’s weight-based cultivation tax and shifting the excise tax collection and remittance from distribution to retail while maintaining the 15% rate in the short term.

However, in a compromise with certain beneficiaries of the cannabis tax revenue, the governor also proposed raising the excise tax rate to 19% if funding for Allocation 3 recipients fell below a baseline of $670 million annually for three years. The cannabis tax Allocation 3 beneficiaries include dozens of childcare programs and youth groups; environmental, wildlife and conservation programs; law enforcement and justice organizations; and drug treatment prevention centers.

Newsom’s 2022 proposal for the excise tax increase to 19% was to achieve “revenue neutrality” to compensate for the potential revenue loss from the state’s $161-per-pound cultivation tax being eliminated.

Although California Assembly Member Matt Haney, D-San Francisco, introduced Assembly Bill 564 on Feb. 12 to block the excise tax from automatically increasing to 19% on July 1, that legislation has yet to make headway in this legislative session.

Cannabis Industry Reactions and Advocacy Efforts

California NORML sounded the alarm on Newsom’s excise tax proposal in May 2022, when the advocacy organization backed a bill by former state Sen. Steven Bradford that not only would have eliminated the cultivation tax but also refrained from increasing the excise tax rate.

Also in May 2022, leaders from four of California’s leading cannabis trade organizations—the United Cannabis Business Association, the California Cannabis Manufacturers Association, the Cannabis Distribution Association, and the California Cannabis Industry Association—wrote a letter to Newsom objecting to the governor’s proposed 19% excise tax increase by July 1, 2025.

Instead of establishing a 15% excise tax floor with a mandatory increase in three years, they asked the governor to consider an alternative that would allow California to “balance the state’s dual goals of funding programs and migrating consumers to the legal market.”

While Allocation 3 funding recipients have a surplus of more than $600 million as of March 2024, according to a budget summary from the state Assembly, licensed cannabis businesses are struggling to stay afloat.

After California’s cannabis retail market peaked at $5.35 billion in dispensary sales in 2021, it slid 13% to $4.67 billion in 2024 sales, according to the DCC.

Alongside the shrinking sales revenues, the California Department of Tax and Fee Administration (CDTFA) has reported falling cannabis tax revenues since 2021, with roughly 15% of the state’s dispensary licensees in default on their cannabis excise tax obligations at the beginning of 2024.

Looking Ahead: The Impact of Higher Taxes on the Industry

Although Newsom touted his administration’s Unified Cannabis Enforcement Task Force seizing $534 million of unlicensed cannabis in 2024, the governor hasn’t promoted the forthcoming excise tax increase that he orchestrated nearly three years ago.

Bill Maher could shed light on where Newsom now stands on this excise tax hike, should the governor make a guest appearance on the TV host’s show.

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