California Lowers Cannabis Taxes As Legal Market Struggles
September 24, 2025
California Governor Gavin Newsom has signed a law that rolls back a 25% tax increase on the state’s legal cannabis industry to help licensed operators compete with the illicit market.
Newsom signed the Assembly Bill 564, authored by Assemblymember Matt Haney (D-San Francisco), into law on Monday, following its passage in the State Senate on September 11 with a 39-1 vote, in the Assembly in June.
The new law reinstates the retail excise tax on cannabis sales to 15%, reversing a scheduled increase to 19% that had followed the elimination of a cultivation tax in 2022. The earlier tax increase, along with falling wholesale prices, made legal cannabis more expensive than illegal cannabis, making it harder to get people to buy from legal stores.
“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 statement.
California’s cannabis tax structure has shifted several times since its recreational use became legal in 2016.
When California got rid of the cultivation tax in 2022, lawmakers passed a law letting the state adjust cannabis sales taxes every two years to make up for any lost money.
Under that system, the tax was supposed to go up to 19% in 2025–26. But the new law stops the increase and keeps the rate at 15% from October 1, 2025, to June 30, 2028.
After that date, the rate could change again, but medical cannabis will continue to be exempt from sales and use taxes.
Lower Taxes To Combat The Illicit Cannabis Market
Part of the reason for lowering the tax was that the illegal cannabis market is still doing better than legal businesses. To fight this, the state has increased enforcement against unlicensed sellers.
Since Governor Newsom started the Unified Cannabis Enforcement Taskforce (UCETF) in 2022, authorities have destroyed over 317 tons of illegal cannabis, worth about $890 million. In 2024 alone, they seized about $534 million of unlicensed products, bringing the total seized since 2019 to around $2.8 billion.
A report by consulting firm ERA Economics estimates that 11.4 million pounds of illicit cannabis are produced in California each year, while legal operators produced 1.4 million pounds in 2024. In this context, “competition from the illicit market means that licensed cultivators effectively compete with unlicensed cultivators in California and other states despite not being able to legally sell across state lines.”
Right now, only about 38% of cannabis used in California comes from legal sources, according to ERA Economics.
High taxes have put a strain on California’s cannabis businesses. As a result, with lower prices and fewer sales, the state is expected to collect about $100 million less in excise tax revenue this year than the $680 million peak it reached in 2021, according to the California Department of Tax and Fee Administration, as reported by Cannabis Business Times.
The author of the bill, Haney, said that lowering the tax rate will make it easier for licensed businesses to compete, protect jobs, keep small operators afloat, and help the legal market capture a larger share of sales.
“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,” she said in a statement.
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