California Gov. Gavin Newsom signed legislation to roll back a 25% cannabis excise tax increase, giving the Golden State’s cannabis businesses some financial relief.
However, with a 15% tax rate, California remains one of the highest taxing states and is joined by Minnesota and Maine, which increased their cannabis taxes this year. Meanwhile, Michigan also looks to raise its excise tax to 24%.
Gavin signed AB 564, introduced by Assemblymember Matt Haney, on Sept. 22. Haney has said the legal adult-use market was “under serious threat of extinction” as rising costs make it difficult for businesses to survive and push consumers to the illegal market.
“California’s cannabis economy can bring enormous benefits to our state, but only if our legal industry is given a fair chance to compete against the untaxed and unregulated illegal market,” Haney, D–San Francisco, said in a statement. “AB 564 helps level the playing field. It protects California jobs, keeps small businesses open, and ensures that our legal cannabis market can grow and thrive the way voters intended.”
The bill went through several amendments in the Assembly and Senate. It was enrolled and presented to the governor on Sept. 17.
“We’re rolling back this cannabis tax hike so the legal market can continue to grow, consumers can access safe products, and our local communities see the benefits,” Newsom said in a press release.
Under previous legislation, AB 195, the cannabis excise tax was increased to 19% on July 1. AB 564 reverts the rate back to 15% beginning on Oct. 1 through June 30, 2028. After then, the California Department of Tax and Fee Administration (CDTFA) would be required to increase the tax by a rate that would generate the amount of revenue that would have been collected pursuant to a cultivation tax that was terminated in 2022.
In a Sept. 15 update, the state’s Legislative Analyst’s Office projected cannabis tax revenue of $773 million for fiscal year 2025-26, assuming the 19% excise tax rate.
According to AB 195, a baseline of $670 million in excise tax revenue is to be spent on youth social programs, environmental programs to address negative impacts of illegal cultivation, and public safety activities — known as Allocation 3 programs. But after the governor transferred $7.1 million from the Cannabis Tax Fund to the Cannabis Control Fund to combat the illegal market, the final 2025-26 state budget in June anticipated only $454.3 million will be available for Allocation 3 programs.
The CDTFA estimated AB 564 will reduce excise tax revenues by $135 million in 2025-2026 and $180 million in 2027-28. State sales tax is applied to the excise tax, so an additional $25 million will be lost in the two-year period.
Dozens of organizations lamented the loss of funding the tax increase would have provided. But industry representatives said the tax increase was an existential threat to businesses. Fewer businesses would result in less tax revenue.
The LAO in its report said its budget forecast assumed the tax hike would reduce the size of the licensed cannabis market. “This negative effect, however, likely will offset only a small share of the revenue raised by the tax hike,” it said.
Cal NORML, a co-sponsor of AB 564, was pleased the law passed. “On behalf of cannabis consumers, we brought together a diverse coalition of industry groups who could all agree on one thing: what’s good for cannabis consumers is good for the cannabis industry,” said Cal NORML director Dale Gieringer in a statement. “We hope this will open a larger conversation about further needed regulatory and tax reforms that will strengthen the legal cannabis market in California.”
“DCC [Department of Cannabis Control] applauds the Governor’s signature on AB 564. It’s an important step to bolster the legal market, steer consumers toward safer products, and safeguard the critical programs Californians count on,” said DCC spokesman David Hafner in an email.
Minnesota raises taxes as sales begin
Just as Minnesota was launching adult-use sales, lawmakers increased the cannabis tax from 10% to 15% in the state budget. The increase, effective July 1, is expected to raise $76.5 million in the next biennium.
Republican Rep. Nolan West opposed the tax change. “The increase in the cannabis tax is not a good idea for a market that’s just getting started,” he said.
Minnesota legalized adult use in May 2023. As state regulators worked through its licensing process, several indigenous tribes began cultivating and selling adult use in their territories in August 2023.
Since June 18, the Office of Cannabis Management has issued 37 business licenses, including 23 to microbusinesses, the agency said in a Sept. 16 statement. But microbusinesses have been waiting for cannabis to grow and manufacturers to supply tested product.
Under a new compact with tribal leaders, microbusinesses can sell tribally grown cannabis. The first sales took place Sept. 16 at Legacy Cannabis, a licensed microbusiness in Duluth. The agency has also issued its first testing lab license to ChRi Laboratories in St. Paul and issued an event organizer license to the Legacy Cup, which was held Sept. 26 and 27.
Maine taxes increase in January. Is Michigan next?
The Maine legislature raised the adult-use cannabis tax from 10% to 14% in its annual budget. The increase takes effect Jan. 1, 2026.
Meanwhile, Michigan’s House of Representatives passed a bill Sept. 26 that would impose a 24% wholesale excise tax rate. It’s anticipated to raise $420 million annually for road improvements.
That would make Michigan the second-highest cannabis taxing state, following Washington, which has a 37% tax, according to MinnPost. Oregon has a 17% tax rate, and Arizona’s is 16%.
