California Rolls Back Cannabis Tax to Aid Struggling Legal Market

Assemblymember Matt Haney of San Francisco authored AB 564, legislation that passed the State Senate 39-1 and the Assembly 74-0 before reaching Newsom's desk in September 2025. The bill suspended a 19% excise tax increase that took effect July 1, 2025, restoring the 15% rate voters approved when they legalized recreational cannabis in 2016 through Proposition 64.

The state had raised the excise tax from 15% to 19% as part of a budget compromise after eliminating the cultivation tax in 2022. That decision, made through AB 195, required the state to compensate for lost revenue by adjusting the excise tax upward every two years. But the increases proved devastating to California's struggling legal cannabis sector, which already faces an identity crisis: legal sales account for only 40% of total consumption while illegal purchases remain untaxed and unregulated.

The consequences were swift and measurable. Taxable cannabis sales in California dropped from roughly $1.5 billion to $1.2 billion as consumers shifted to the illicit market to avoid added taxes. "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 said in a statement. "AB 564 helps level the playing field."

Under the signed legislation, the 15% excise tax rate remains frozen until June 30, 2028. After that date, the California Department of Tax and Fee Administration must adjust rates to generate revenue that would have been collected under the old cultivation tax, though increases cannot exceed 19%. A report is due to the Legislature by October 1, 2027, analyzing the tax law's effects and recommending potential reforms. Newsom emphasized the broader implications: "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."