California is set to implement a significant increase in its cannabis excise tax, raising the rate from 15% to 19% starting July 1. The move, announced by the California Department of Tax and Fee Administration (CDTFA), represents a 24% hike and will bring the state to its maximum allowable cannabis tax rate under current law.
Triggered by Revenue Decline
The tax increase stems from a 2022 legislative package that removed the state’s flat cultivation tax, which had placed a disproportionate burden on small growers. However, the law included a stipulation: if overall cannabis tax revenue were to decline, the state would be required to adjust the retail excise tax upward to compensate. This clause has now been activated, following a consistent drop in legal cannabis sales and tax receipts.
Mounting Pressure on Legal Operators
California’s legal cannabis industry is already facing a host of challenges, including burdensome regulatory requirements, high operational costs, and fierce competition from the state’s entrenched illicit market. Stakeholders warn that the tax hike will compound financial pressures, making it harder for legal businesses to compete and survive.
Many industry participants argue that the increase could unintentionally drive more consumers toward unlicensed sellers, undermining public safety and further eroding the tax base. The disparity between regulated and unregulated pricing continues to be a major barrier to consumer retention within the legal market.
Long-Term Viability in Question
Data from the CDTFA shows cannabis tax revenue has declined steadily over recent quarters, falling from more than $300 million in Q2 2022 to approximately $216 million in Q4 2023. Industry advocates maintain that rather than solving the problem, a higher excise tax may accelerate market contraction and reduce overall revenue in the long run.
As the July 1 implementation date approaches, attention is shifting toward broader tax and regulatory reforms that could help stabilize the legal cannabis sector in the world’s largest cannabis economy.