California's cannabis tax hike threatens legal market

In California, a significant increase in cannabis taxation is expected to take effect on July 1, 2025, raising the state excise tax from 15% to 19%. Currently, cannabis is subjected to much higher taxes than other regulated products, such as alcohol and tobacco. For instance, a joint incurs a tax of approximately $1.25, which would rise to $1.57 with the impending tax increase, whereas a glass of wine incurs merely a penny in state taxes. Furthermore, a single cigarette is taxed about 14 cents, highlighting the disparity in taxation across different products. Despite the cannabis industry generating more tax revenue than alcohol, its heavy taxation creates challenges for businesses within the legal market. Increasing the excise tax by an additional 25% will further burden legal cannabis retailers, making it increasingly difficult for them to compete against the thriving illicit market, which does not impose such taxes. The illicit market remains attractive to consumers due to the cost advantage it offers, leading to decreased tax revenue for the state as those figures drop in parallel with illicit market usage. A critical piece of legislation, Assembly Bill 564 (AB 564), is under consideration by the California legislature to provide a possible reprieve to the legal cannabis industry. If passed and signed into law by Governor Gavin Newsom, AB 564 aims to allow for adjustments to the excise tax rate and stabilize the troubled cannabis market by preventing the scheduled tax increase. This proposed legislative change underscores the urgency faced by the industry since economic loss coupled with heavy taxation endangers thousands of jobs across California. Organizations like the California Cannabis Operators Association argue that legal cannabis businesses require tax relief to remain solvent and emphasize the importance of AB 564 in supporting the sector. As of now, more than 60% of California jurisdictions still prohibit cannabis retail sales, limiting access and market growth, which further constrains potential tax revenues. Given the high taxation paired with the constraints faced by the market, stakeholders worry that increasing taxes might inevitably push more consumers back into underground markets, which would exacerbate the issues of regulatory compliance and consumer safety prevalent in unregulated spaces.