California Cannabis Retailers Face Steep Customer Growth Needs to Survive July Tax Hike

Licensed cannabis retailers in California are facing an uphill battle as they prepare for a potential increase in excise taxes this summer. If the tax increases from 15% to 19% on July 1 as planned, stores would need nearly 200 additional customers each month to maintain current revenue levels, according to a leading operator’s internal analysis.

Increased Taxes Threaten Stability of Legal Market Amid Illicit Competition

Retailers argue that this level of customer growth is unrealistic, especially as price-sensitive consumers increasingly turn to the more affordable illicit market. Although the 2022 tax overhaul removed the cultivation tax—a move praised by farmers—the relief was short-lived. The financial burden has now shifted to retailers through a restructured excise tax collection system, where taxes are based on gross receipts rather than markup rates.

California Sales Continue to Decline as Average Spending Drops

Sales across the state have already dipped from $5.1 billion in 2023 to $4.6 billion in 2024. Compounding the issue is the shrinking average transaction value per customer, which has dropped from around $80 in previous years to about $50 today. This trend, driven by economic uncertainty and inflation, means retailers are making less from each visit while being taxed more on those diminishing returns.

New Tax Burden Leaves Retailers With Fewer Survival Options

With the planned excise tax increase, the cost burden grows heavier, pushing more stores toward potential closure. Retailers say they are being squeezed between shrinking consumer spending and growing competition from untaxed illegal operations. Many cannabis businesses are already operating on thin margins, and the extra burden could be too much to absorb without substantial consumer growth.

Lawmakers Push Back But Timeline for Relief Is Tight

Although state lawmakers, such as Assembly Member Matt Haney, have proposed freezing the excise tax increase, it may be too late. Any legislative action would need to be fast-tracked and supported by Governor Gavin Newsom, who has not included cannabis tax relief in his latest budget.

State Budget Pressures May Override Industry Concerns

With California facing projected budget deficits exceeding $10 billion and additional financial strain due to reduced federal funding, there is increasing pressure on the state to maintain or grow tax revenue rather than reduce it. This dynamic places the cannabis industry in a vulnerable position, with fewer policy allies and rising operational risks.

Legal Market Shrinks as Consumers Choose Lower Prices in Illicit Trade

The illicit market in California continues to dominate, estimated to be nearly twice the size of the legal one. With every price increase driven by taxes, the gap between legal and illegal options widens, making regulated cannabis less attractive to consumers already feeling the pinch of high living costs.

Retailers Face Urgent Need for Policy Action to Prevent Further Decline

Without swift intervention, the July tax increase may accelerate the decline of California’s legal cannabis industry. Retailers say they cannot be expected to deliver a surge of new customers when the average consumer is already scaling back spending—and when untaxed, unregulated alternatives remain so readily available.