• California's cannabis excise tax increased from 15% to 19% on July 1, 2025, adding pressure to a struggling legal market.
  • Assembly Bill 564, which would reverse the increase and restore the 15% rate as soon as October 1, has been introduced but remains unsigned by Governor Gavin Newsom.
  • Industry advocates warn the higher tax burden will further disadvantage legal operators against the illicit market, potentially accelerating a decline in taxable sales that are already down 30% from their 2021 peak.

A Heavier Burden

California's legal cannabis operators are grappling with a significant new financial pressure as a state excise tax increase took effect this quarter. The tax rate rose from 15% to 19% on July 1, compounding the existing burden of high local taxes and regulatory fees that have long challenged the sector's profitability.

The increase comes at a precarious time for the industry. Statewide taxable sales have been on a steady decline, falling approximately 30% from the peak seen in 2021. Legal businesses, which have been vocal about their struggles, now face even thinner margins. "This is the exact opposite of what the industry needs right now," said a representative from a Northern California cultivation group who requested anonymity to discuss sensitive policy matters. "Every percentage point makes the legal market less competitive."

Legislative Lifeline in the Balance

Efforts to provide immediate relief are currently stalled in Sacramento. Assembly Bill 564, which has garnered support from industry advocates, proposes to repeal the recent increase and revert the excise tax to 15%. The legislation is written to take effect as soon as October 1, 2025, if signed into law. However, Governor Gavin Newsom has not yet taken action on the bill, leaving businesses in a state of uncertainty.

A staffer for a state assemblymember involved with the bill suggested that negotiations are ongoing, but timing for a potential signature remains unclear. "There's recognition of the problem, but the legislative calendar is crowded," the staffer said. Repeated attempts to reach the governor's office for comment on the timeline for AB 564 were not successful.

Squeezed Between Regulation and Illicit Competition

The core argument from those pushing for tax relief is that high costs are the primary driver pushing consumers toward the untaxed and unregulated illicit market. With the new 19% state tax layered on top of local business taxes and sales tax, the price disparity between legal and illegal products has widened further.

Some local jurisdictions are attempting to mitigate the state-level increase. The city of Long Beach, for instance, recently moved to lower its local cannabis business tax rate in an effort to provide some offsetting relief to operators within its borders. These piecemeal local efforts, however, are unlikely to counter the broader statewide trend. Without a deal to lower taxes soon, many in the industry fear a wave of consolidation and business failures could follow, ultimately reducing the state's tax revenue base—a counterproductive outcome for all parties.

Correction: An earlier version of this article misstated the effective date of the tax increase. It was July 1, 2025, not Q3 2025.