A looming excise tax increase threatens the viability of the California cannabis industry, business owners and industry advocates fear, as one cannabis market research firm drops its estimated 2025 revenue for the Golden State by over $600 million.
A bill to freeze the tax at its current 15% rate was approved Tuesday, April 22, by the California Assembly Committee on Business and Professions on a 15-0 vote. It now heads to the Revenue and Tax Committee, where it will likely face stiffer consideration.
“We anticipate that Rev[enue] & Tax will be a pretty heavy lift, considering how tight the CA budget is again this year,” said Ellen Komp, deputy director of California NORML, which is a co-sponsor of the legislation.
Proposition 64, which legalized adult use in 2016, imposed a 15% excise tax on cannabis sales and a cultivation tax based upon the dry weight of flowers ($9.25/ounce) and leaves ($2.75/ounce). These taxes make up the California Cannabis Tax Fund. The funds are used for certain government departments that implement cannabis laws, university research, and various community social programs.
In 2022, the law was changed to suspend the cultivation tax. But on July 1 of this year, the retail excise tax is set to increase to up to 19%. By May 1, the California Department of Tax and Fee Administration (CDTFA) is supposed to figure out the amount the state would have collected from the suspended cultivation tax to determine the new tax rate.
A spokesperson for the CDTFA told CRB Monitor News the department is “on track to publish the excise tax rate in early May 2025,” and that cannabis account holders would be notified.
The excise tax is on top of the state’s regular sales tax and local jurisdiction taxes. The result is that taxes can be as high as 45% in some areas of California, according to Assemblymember Matt Haney of San Francisco who introduced AB 564 to freeze the excise tax to 15%.
“If we continue to pile on more taxes and fees onto our struggling small cannabis businesses, California’s cannabis culture is under serious threat of extinction,” he said in public statements.
AB 564 is co-sponsored by six cannabis industry organizations and supported by dozens of other organizations and cannabis-related businesses, many of which came to Sacramento to voice their support at the meeting. Kiva Senior Director Caren Woodson, representing the California Cannabis Industry Association, and Kristin Heidelbach of the United Food and Commercial Workers joined Haney in presenting the bill to the committee.
Komp said in an email that CaNORML’s Action Alert has generated nearly 1,250 letters of support.
The bill also faces stiff opposition from more than 100 community organizations that fear their funding would be cut if the tax is not increased, including tribal organizations that said the cannabis tax is the only money they receive for youth and public health programs.
But proponents of the bill say that if the tax increase moves forward, there will be fewer businesses to tax, and more consumers will buy from the cheaper illicit market.
“As businesses shutter, we lose those tax dollars,” Heidelbach told the committee.
Illicit market dominates as business licenses, tax revenue decline
While still the leading state in the number of licensed cannabis businesses, California’s adult-use market has lost 30% of its active licenses in the past two years, according to CRB Monitor research. By the end of 2024, there were 8,464 active licenses.
Taxes and other high costs of doing business in the face of dropping revenue have been to blame for the collapse of large and small operators alike. Gold Flora is one of the latest big brands to go into receivership while hundreds of provisional license holders gave up in 2024 rather than convert to annual licenses.
“California cannabis has considerably higher fees and excise taxes relative to product value. The value of cannabis at wholesale in California is 35 percent higher than in Michigan. However, excise tax collections are 124 percent higher, and fees are 162 percent higher,” according to a report commissioned by the California Department of Cannabis Control and written by ERA Economics, a Davis-based research firm that specializes in California agriculture and water resources.
Because these costs are largely passed on to the consumer, the licensed market supplies only 40% of the total estimated consumption in the state, leaving approximately 60% to the illicit market, the researchers said in their report, “California Cannabis Market Outlook 2024.”
As of 2024, around 1.4 million pounds of licensed cannabis are produced and consumed in California, according to the report. Consumption, based on federal surveys, is around 3.8 million pounds. Legal homegrown consumption was not taken into account in the study, however.
The research report says production and the licensed retail market have grown between September 2022 and October 2024, but total retail sales revenue has been dropping since 2021.
“This is driven by lower unit prices, not by lower quantity of cannabis demanded,” said the report. “The licensed market is continuing to expand (as measured by volume of product) but falling unit prices cause the total sales value to decrease.”
Competition from the illicit market contributes to lower prices in the licensed market. But so did the elimination of the cultivation tax.
“Analysis showed that the tax suspension may have resulted in the reduction of wholesale flower prices by more than $161 per pound,” the report said. “This would suggest that market intermediaries (e.g. distributors and retailers) and end consumers are the main beneficiaries from the elimination of the cultivation tax.”
Falling prices naturally leads to a reduction of tax income. Total cannabis tax revenue from the fourth quarter 2024 was $219 million, including $127.8 million in excise taxes and $91.2 in state sales tax, according to the CDTFA. This is down 13.7% from the total $253.8 million in the third quarter. The excise tax dropped 14.9% from $150.1 million.
Total excise tax collected in calendar year 2024 was $593.6 million compared to $626 million in calendar year 2023. Cannabis tax revenues peaked in fiscal year 2021-22 at over $800 million.
Cannabis Tax Fund has money to spare
Still, despite mandatory minimum expenditures required by law, the state is not spending all the revenue collected in the Cannabis Tax Fund.
In fiscal year 2023-2024, the account had a balance of $469.6 million and took in $629.4 million in taxes, according to the DCC’s Condition and Health of the Cannabis Industry in California supplemental report. But it spent only $560.5 million because legislators contributed $150 million from the general fund. For this fiscal year, estimated revenue is $603.7 million and expenditures are nearly $674.0 million, leaving a balance of $468.2 million.
For fiscal year 2025-26, the governor’s budget projects that cannabis tax revenues will be about $761.9 million, assuming the excise tax will increase to 19% on July 1. Expenditures are budgeted at $610.2 million.
Whitney Economics drops cannabis forecast
Because of oversupply, local and state taxation, and lack of federal marijuana policy reform, cannabis research firm Whitney Economics has lowered its 2025 forecast for the U.S. by $1.2 billion from its forecast a year ago. About half of that drop comes from California at $606 million.
A Whitney Economics spokesperson said the new 2025 revenue estimate for California is $5.46 billion. Nationwide, cannabis revenues are now estimated at $34.0 billion for 2025 and $52.4 billion by 2030.
Whitney Economics said price-sensitive consumers are willing to pay more for legal cannabis if the price differential is not too great. “However, a recent analysis of state and local cannabis prices indicated that states with high taxes are lagging behind other states in terms of the percentage of legal participation,” the research firm said in an April 9 press release.
“There is more supply authorized by state regulators than there is demand throughout the entire U.S., both legal and illicit, which is driving down prices to such an extent that it is impacting state tax revenues, operator profitability and is increasing business failures.”
