California’s cannabis industry, once celebrated as one of the biggest markets in the United States, is now at a crossroads. The legal market has faced significant challenges over the years, from high taxes and overregulation to declining sales and growing competition from the illicit market. Now, an upcoming tax hike threatens to push the industry even closer to collapse.
Assembly Bill 564, introduced by Assemblymember Matt Haney, seeks to address this issue by preventing a proposed 25% increase in the state’s cannabis excise tax, set to take effect on July 1, 2025. If the tax hike goes through, it could trigger a ripple effect throughout California’s cannabis industry, exacerbating challenges in an already overtaxed and overregulated legal market.
What Would AB 564 Do?
At its core, AB 564 proposes to repeal a requirement that would allow the California Department of Tax and Fee Administration to raise the state cannabis excise tax from the current rate of 15% to as high as 19%. This adjustment was initially implemented to compensate for the state’s elimination of a cultivation tax in 2022.
Without this bill, the excise tax will automatically increase, adding further financial strain on cannabis retailers, producers, and consumers. AB 564 aims to stabilize the current tax rate at 15%, providing some much-needed relief to the already struggling legal cannabis market.
Legislation like AB 564 is not just about preventing tax hikes—it is about rescuing an industry that is vital to California’s economy.
Why Is Assembly Bill 564 Much Needed?
Most Californians don’t realize just how heavily taxed and regulated the legal cannabis industry already is. Unlike other industries, cannabis businesses face multiple layers of taxation, including state excise taxes, local sales taxes, and additional cannabis-specific municipal taxes.
For example, in some areas, consumers pay more than 35% in combined taxes on legal cannabis purchases. These exorbitant rates make legal cannabis far less affordable than products on the unregulated market.
Assemblymember Haney explained the dilemma succinctly during a recent press conference at the State Capitol, “If you keep on taxing and taxing a set of businesses that are already competing with folks who are paying no taxes, eventually those folks are going to go out of business entirely, and you’re not going to get anything.”
This captures the heart of the issue. Over-taxation doesn’t just harm businesses—it drives consumers back to the illicit market, undermining public health and safety initiatives that the regulated market was built to support.
The Current State of the California Cannabis Industry
California’s legal cannabis industry already shows signs of distress. Since the elimination of the cultivation tax in 2022, sales and tax revenues have continued to decline. According to data from the California Department of Cannabis Control, legal cannabis sales have dropped by 19% since 2021, and excise tax revenue has declined by 13%.
Adding to these financial challenges, thousands of businesses have shuttered, and the industry has experienced massive job losses. Between 2022 and 2023 alone, the legal market lost nearly 18,000 jobs—an alarming statistic for an industry once hailed as a huge source of employment and revenue for California.
These struggles are compounded by competition from other states like Michigan. Despite having only one-quarter of California’s population, Michigan now generates more revenue from legal cannabis sales. The difference? Michigan’s cannabis industry isn’t burdened with the same high taxes and regulatory red tape.
Why High Taxes Are a Problem for Producers and Consumers
High taxes don’t just hurt cannabis businesses—they hurt consumers, too. When costs rise due to taxes, producers and retailers are forced to pass these expenses on to consumers through higher product prices.
Unfortunately, this often leads consumers to seek cheaper alternatives from the illicit market, which is free of strict regulations and taxes. This behavior undermines one of the primary goals of Proposition 64, which legalized adult-use cannabis in California in 2016: the transition of cannabis sales from the illicit market to a safe, regulated marketplace.
The illicit market doesn’t just pose economic challenges—it theoretically also jeopardizes consumer safety. Unregulated cannabis products are not subject to the same testing as those sold in licensed dispensaries, increasing the risk of harmful contaminants. However, with reporting over the last year, the legal California cannabis industry isn’t as clean as originally planned.
Impact of Assembly Bill 564
If AB 564 passes, it will provide immediate relief to businesses and consumers while supporting the long-term viability of the legal California cannabis market. Additionally, it could help the state meet its goals of reducing illicit market activity and ensuring that consumers have access to safe, high-quality products.
From a broader perspective, preventing the excise tax hike would stabilize the industry, allowing businesses to reinvest in their operations, retain employees, and remain competitive on a national scale.
However, failing to pass AB 564 could have devastating consequences. Industry experts warn that an increase to a 19% excise tax could trigger a wave of closures, job losses, and additional decreases in state tax revenue.
Despite its benefits, AB 564 does face criticism. Opponents argue that preventing the tax increase would reduce funds for critical programs, such as children’s health initiatives and public safety.
However, supporters counter that overtaxing the industry would ultimately result in less revenue, as businesses close and consumers return to the illicit market. This perspective aligns with Assemblymember Haney’s argument that a shrinking industry cannot sustain higher tax rates—it will simply collapse under the pressure.
Where Does the Bill Stand?
AB 564 is currently under consideration by the Assembly Business and Professions Committee. Cannabis industry leaders, such as the California Cannabis Operators Association (CaCOA), are urging lawmakers to act quickly, emphasizing that time is of the essence.
Alex Freedman, President of CaCOA, describes AB 564 in a recent press release as a “lifeline” for businesses on the brink of closure. “Raising taxes in a shrinking market is shortsighted and fiscally irresponsible,” Freedman said. “AB 564 will help level the playing field, protect jobs, and keep California competitive in the national cannabis economy.”
Assembly Bill 564 is a massive moment for California’s legal cannabis market. By preventing the planned tax increase, the state can stabilize the industry, protect jobs, and continue working toward the goals of Proposition 64.
For businesses and consumers alike, the passage of AB 564 would signal a commitment to supporting a struggling industry rather than taxing it into extinction.
To help ensure the survival of California’s legal cannabis market, contact your local representatives and express your support for AB 564. Together, we can make a meaningful difference for the California cannabis industry.
