The Challenges Facing California’s Cannabis Industry Amid Rising Taxes

By Karl Cooke | Fri, May 9th, 2025 at 5:22 AM

The cannabis market in California has been navigating turbulent waters in recent years, aiming to sustain both legal businesses and the broader industry. With changing regulations and increasing tax burdens, the landscape for cannabis operators is becoming increasingly challenging.

Upcoming Tax Hike: What You Need to Know

Starting on July 1st, the tax rate on cannabis in the state of California is set to rise from 15% to 19%. This adjustment is expected to significantly impact legal cannabis businesses, creating additional hurdles for operational continuity.

The Financial Implications

California’s tax increase comes at a time when overall state revenue has taken a downturn as the fiscal year 2024 came to a close. Lawmakers are now scrambling to devise strategies to support struggling cannabis businesses. The push for alterations to tax legislation has led to the introduction of Assembly Bill 564 (AB 564), sponsored by Assemblymember Matt Haney.

Assembly Bill 564: A Lifeline for Legal Cannabis?

AB 564 aims to block the upcoming tax hike, thereby allowing legal cannabis businesses to better compete against the unregulated market. Haney has expressed growing concerns over the proportion of cannabis sales captured by illegal operators:

“The legal cannabis industry, which is subject to state and local taxes and fees, is constantly at a threat of being overtaken by the illegal untaxed industry. Fully licensed legal businesses in California capture just 40% of the state’s entire market, while the underground illegal market accounts for 60% of the overall market.”

Declining Consumer Engagement

The statistics surrounding consumer participation in California’s legal cannabis market paint a concerning picture. As engagement plateaus at just 40%, there are signs of a downward trend. In light of this, some states like Michigan have overtaken California in sales, jeopardizing the state’s leadership in the cannabis sector.

Tax Structures and Market Sustainability

Amy Jenkins from the California Cannabis Operators Association points to the troubling statistics regarding tax structures. According to recent analyses commissioned by the Department of Cannabis Control, California’s excise taxes and licensing fees are:

• 124% higher than Michigan’s excise taxes
• 162% more costly in licensing fees

Furthermore, these taxes and fees consume a staggering 77.5% of the total wholesale value, raising serious questions about the long-term sustainability of this model.

The Legislative Journey of AB 564

After a mixed reception from stakeholders, the Assembly Committee on Revenue and Taxation voted in favor of AB 564. The support indicates a legislative acknowledgment of the hardships endured by cannabis businesses in California. As the bill moves forward, it is currently undergoing revisions for a second reading.

Looking Ahead: Prospects for California’s Cannabis Industry

The ongoing legislative changes along with the rise in taxes signify a critical juncture for California’s cannabis industry. Policymakers will need to carefully consider the balance of creating a fair taxation framework while simultaneously ensuring that legal operators can thrive in the market.

Conclusion

As California navigates this complex landscape, the future of its legal cannabis industry will depend significantly on the ability to adapt to changing regulations and market pressures. Stakeholders must remain engaged in the legislative process to advocate for policies that support a sustainable and equitable cannabis market.