California Cannabis Industry at a Breaking Point as Tax Hike Threatens Legal Market’s Survival

Impending Excise Tax Increase Could Push More Consumers Toward Illicit Cannabis and Endanger Small Businesses Across the State

A storm is gathering over California’s legal cannabis industry, and it could strike with full force on July 1. That’s when the state’s excise tax on cannabis products is set to jump from the current 15 percent to 19 percent—an increase that experts and industry insiders warn will push legal operators to the brink while further empowering the already-dominant illicit market.

The planned tax hike is not a new proposal but the delayed result of prior legislation. Though designed to replace burdensome cultivation taxes, the mechanism built into state law will automatically raise the excise tax without legislative intervention, placing the onus on lawmakers to act before the deadline. If they don’t, California’s multibillion-dollar legal cannabis market—already stressed by overregulation, local bans, and illicit competition—could see a mass exodus of licensed businesses and consumers.

Legal Cannabis Consumers Already Pay a Premium—and the Gap Is Widening

Cannabis consumers in California already pay some of the highest taxes in the country when shopping at licensed dispensaries. Between state and local excise taxes, sales taxes, and additional levies imposed by municipalities, the final cost of a legal cannabis purchase can swell by as much as 44 percent over the sticker price. The California Department of Tax and Fee Administration (CDTFA) provides estimates that demonstrate how a simple $35 cannabis purchase becomes a $50 transaction under current conditions—and that’s before the proposed 4 percent tax hike.

With the planned increase, that same transaction would creep closer to $60. This price inflation is likely to drive even more consumers to the illicit market, where cannabis products are often sold at a steep discount—without taxes, packaging regulations, or safety testing. These unlicensed operations not only deprive the state of revenue but also jeopardize public health and undercut legal businesses.

Illicit Market Still Dominates, Despite Billions in Legal Revenue

Despite generating approximately $7 billion in tax revenue since adult-use legalization took effect in 2018, California’s legal cannabis sector remains plagued by competition from unregulated operators. Data from the Department of Cannabis Control (DCC) reveals that in 2024, roughly 63 percent of the 3.8 million pounds of cannabis consumed in the state originated from unlicensed sources.

This dominance of illicit cannabis is no surprise when consumers can access untaxed, lower-cost products outside the legal system. But while consumers may benefit from cheaper prices, the long-term effects are harmful to the entire industry. Legal operators must pay licensing fees, comply with strict regulatory oversight, and face continual financial pressures, while their underground competitors operate freely and often invisibly.

Small and Equity-Owned Businesses Stand to Lose the Most

The planned excise tax hike poses an existential threat to small cannabis businesses, especially those owned by independent entrepreneurs and social equity licensees. These operators frequently work within tight profit margins and are less able to absorb additional costs or reduce pricing to remain competitive. Many already struggle with limited access to capital and must operate in cities that permit cannabis commerce, as over half of California’s municipalities still ban retail storefronts.

For these businesses, the proposed increase could be the final straw. While larger companies may weather the storm through consolidation or economies of scale, smaller operations risk being squeezed out altogether. The result could be a less diverse, less inclusive industry—contrary to the values that underpinned California’s original push for cannabis reform.

Other States Offer a Blueprint for Sustainable Cannabis Policy

California was once seen as the nation’s cannabis pioneer. But as the state grapples with the burdens of its own regulatory framework, other states like Michigan and Missouri have surged ahead with more accessible and less punitive cannabis programs. Lower taxes, fewer barriers to entry, and streamlined licensing procedures have helped these states not only expand access but also outpace California in per capita cannabis sales.

This growing disparity is more than symbolic—it reveals a fundamental weakness in California’s approach. By continuing to treat cannabis primarily as a tax revenue source rather than a legitimate industry in need of support, the state undermines its own market. Without a course correction, California risks falling further behind in a sector it helped create.

AB 564 Offers a Targeted and Time-Sensitive Solution

Recognizing the urgency of the situation, lawmakers have introduced Assembly Bill 564, authored by Assemblymember Matt Haney (D). The bill seeks to freeze the cannabis excise tax at 15 percent until 2030, allowing the industry breathing room to stabilize and adjust to evolving market conditions.

This measure is not a tax break for the sake of profit—it is a lifeline. AB 564 provides the time and space for California regulators, operators, and lawmakers to evaluate a long-term tax structure that promotes sustainability and reduces the incentive to shop outside the legal market.

The bill has already received unanimous support from the Assembly Business and Professions Committee, signaling widespread acknowledgment that the scheduled tax hike is counterproductive. If passed, AB 564 would serve as a stepping stone toward more thoughtful cannabis regulation—regulation that encourages compliance, discourages illicit sales, and ensures fairness across the supply chain.

California’s Cannabis Future Hinges on Smart, Decisive Policy

As the July 1 deadline looms, the decision before California lawmakers is clear: allow an automatic tax hike that could decimate the legal cannabis market, or act swiftly to pass AB 564 and preserve the gains made since legalization. The choice is not just about revenue—it’s about long-term viability.

Cannabis operators in California have shown remarkable resilience in the face of regulatory and financial adversity. But resilience has limits. Without meaningful reform, many of these businesses may not survive another year, let alone the next decade.

Protecting the cannabis industry is not only a matter of economic policy; it’s a matter of equity, safety, and social progress. The state that once led the nation in cannabis reform must now prove it can lead in cannabis sustainability. With bold, rational action, California can reclaim its place at the forefront of the legal cannabis movement—but only if it acts before it’s too late.