The cannabis industry in California has long struggled to find its footing under the weight of heavy taxation and regulatory hurdles. Last week, those struggles reached a critical point. The California Assembly Business and Professions Committee passed AB 564, introduced by Assemblymember Matt Haney, which is an effort to block an upcoming excise tax increase scheduled for July 1st.
If enacted, the bill would prevent the state’s current tax rate on legal cannabis sales from climbing from 15% to 19%. This would be a huge milestone in a larger effort to ensure the survival of the cannabis businesses that remain in operation, while also offering a warning to policymakers about the unintended consequences of overtaxation and regulation in the industry.
The Need for AB 564
The California cannabis industry, once projected to thrive under legalization, has found itself under siege from a mix of state-mandated taxes, compliance costs, and a persistent illicit market. Legal cannabis businesses face taxes at nearly every stage of production and sale, with additional costs, such as local taxes and compliance fees, piling on top. Despite these high costs, legal cannabis operators account for just 40% of the state’s cannabis market, with the remaining 60% dominated by untaxed, illicit operations.
Now, with a scheduled tax increase looming, industry stakeholders have sounded the alarm. At a recent committee hearing, Assemblymember Haney and cannabis advocates stressed that the tax hike would mark a tipping point for many businesses. According to Haney at the hearing and a press release by CAL NORML, “This tax increase would be an extinction event,” creating conditions that could drive even more growers, distributors, and retailers out of business. If passed into law, AB 564 aims to halt what many industry experts see as an impending disaster, keeping rates at their current level to give struggling businesses a fighting chance.
The Real-World Impact of Over-Taxation
The hard numbers paint a troubling picture of the industry’s trajectory. Active cannabis licenses in California dropped by 18% in 2024 alone, with several prominent companies, such as MedMen and HERBL, stopping operations. These closures highlight how even well-capitalized businesses have been unable to weather the immense financial pressures of over-taxation and compliance. For smaller players, particularly mom-and-pop operators and social equity licensees, the challenge of staying afloat is even more daunting.
Social equity businesses, designed to provide opportunities for individuals from communities disproportionately harmed by cannabis criminalization, are among those hardest hit. They often lack the resources to survive extended financial strain, forcing many to close their doors quietly without the fanfare of larger collapses. This, in itself, represents a loss for the communities these programs were created to uplift.
Taxing a legal industry to this extent not only forces businesses to close but also undermines the state’s original promises under Proposition 64. Prop 64 aimed to create a safe, equitable, and transparent cannabis market. However, heavy taxes and regulations have stifled its growth, driving consumers back to the unregulated market where products remain untaxed, untested, and potentially unsafe.
Why AB 564 Matters
AB 564 doesn’t propose lowering taxes; it simply seeks to maintain the existing 15% tax rate, rather than allowing it to rise to 19%. While it may seem like a modest step, the stakes are incredibly high. A higher tax rate will not only discourage consumers from purchasing legal cannabis, as it’s far cheaper to purchase from the illicit market, which will continue to severely impact the revenues of compliant businesses, which already face shrinking margins.
By halting the tax hike, AB 564 offers a much-needed reprieve for licensed operators. It ensures that they can continue competing with illicit businesses while still contributing their share to local economies and generating tax revenue for the state. Assemblymember Haney and advocates behind this bill believe that the solution to California’s cannabis tax woes lies in creating a more equitable system. Legal operators, they argue, should not be punished with higher taxes while the state has yet to collect from illicit and uncompliant markets.
During the committee hearing, Kristin Heidelbach of the United Food and Commercial Workers pointedly observed that “it is possible to tax an industry to death.” The goal of the bill, she emphasized, is not just fairness but feasibility. Squeezing the legal market for more revenue, she argued, risks shrinking it further, ultimately undercutting tax collections rather than increasing them.
What’s Next for AB 564?
Having cleared the Assembly Business and Professions Committee with a unanimous vote of 15-0, AB 564 now moves to the Assembly Revenue and Taxation Committee for further consideration on May 5. The committee will likely debate its fiscal implications, given California’s ongoing budget challenges. While some fear that freezing the tax rate will reduce funding for critical services like youth programs, proponents argue that the long-term health of the state’s cannabis industry depends on policies like AB 564.
Assemblymember Haney has already shown a willingness to work toward a compromise, even circulating draft amendments that could address concerns over lost revenue streams. Still, opposition remains from groups benefiting from cannabis taxes, making the road ahead uncertain.
A Call for Action
Organizations like Cal NORML have been at the forefront of this fight, rallying grassroots support to protect the legal market. They stress that a healthy, regulated cannabis industry is good for everyone—not just those directly involved, but the larger economy and community as well. Letters, phone calls, and other demonstrations of public support could help ensure AB 564’s passage and with it, a turning point for an industry on the brink.
Whether or not AB 564 becomes law, its underlying message is clear. California cannot continue to overburden its legal cannabis industry and expect it to thrive. Policymakers must take a hard look at the current tax structure and work toward solutions that promote sustainable growth and equity. After all, an industry taxed to death benefits no one—not the consumers who depend on it, not the businesses trying to survive, and certainly not the state.
Now is the time to act. Support AB 564 to secure the future of legal cannabis in California and build the safe, equitable, and accessible industry voters envisioned with Prop. 64.
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