California freezes cannabis tax hikes to bolster a struggling legal market

In a rare display of unity, the’California Assembly unanimously voted this week the Report of a planned increase in the cannabis tax, thus granting a temporary reprieve to the state's legal industry, in trouble.

The measurement, AB 564, presented by Democratic Assemblymember Matt Haney, aims to freeze the excise tax on cannabis at 15% until the’Fiscal year 2030-2031, thereby suspending a previously announced increase to 19% that was set to take effect on July 1.

A lifeline for legal cannabis businesses

With a final result of 74 votes to 0, The bill was passed by the Assembly and will now be submitted to the State Senate. Proponents of the measure are pushing for its provisions to be included in a budget bill to speed up its implementation and avoid any delays until next year.

«AB 564 freezes the cannabis excise tax at 15% and gives legal businesses in the sector a chance to survive in an industry that is shrinking every day,» said Joe Duffle, president of UFCW Local 1167, which represents many workers in the sector.

Mr. Duffle warned that the proposed tax increase «would only drive more legal cannabis businesses into bankruptcy» and strengthen the illicit cannabis market. According to him, a tax increase risks driving consumers away from regulated stores toward unlicensed operators, who often sell untested, untaxed, and unregulated cannabis products.

If the tax freeze is well received by Cannabis legal operators, it is, however, only a temporary measure, not a solution. The state's legal cannabis market is facing a intense competition from illegal vendors and to Persistent regulatory obstacles, the stakeholders agree on the need for a more comprehensive reform.

Measure the impact of tax relief

Under the bill, the California Department of Tax and Fee Administration (CDTFA), in collaboration with the Department of Finance, would be responsible for ensuring revenue neutrality. The agency would calculate a future adjustment to the excise tax based on the estimated revenue that would have been collected under the former system of weight-based cultural tax, which was abolished in 2022.

The bill provides for the publication of annual reports starting December 1, 2026, detailing gains or losses on Tax policies on cannabis resulting from the freeze. According to the text of the bill, «the specific objective of reducing the excise tax rate on cannabis is to’provide immediate tax relief to the cannabis industry.

This approach aims to strike a balance between supporting the industry and addressing the government’s budgetary concerns. By closely monitoring tax revenues, lawmakers hope to avoid a deficit while giving the legal market a competitive advantage.

Although the tax rate remains at 15%, the tax revenues from cannabis in California continue to support various public initiatives. Last month, the government distributed a new batch of Community reinvestment grants to local health services and nonprofit organizations. These funds are intended to address the health and economic disparities exacerbated by the past criminalization of cannabis, particularly in communities historically affected by drug enforcement.

Legal Clarity in a Context of Federal Uncertainty

The tax deferral comes at a time when California’s legal framework for cannabis is receiving further support from the courts. In a separate but related case, the California Supreme Court The Supreme Court overturned a lower court decision that suggested local authorities could invoke the federal ban to block certain aspects of the state-regulated market. This decision was seen as a victory for the integrity of California's cannabis laws.

At the same time, regulatory uncertainty at the federal level remains a significant hurdle. A recent state-commissioned report highlighted that the inability to engage in Interstate cannabis commerce, a direct consequence of federal prohibition, contributes to maintaining the illicit market by limiting the growth of regulated businesses.

Although the Governor Gavin Newsom signed a bill in 2022 authorizing the State to enter into interstate cannabis agreements, these measures are contingent upon a change in federal policy or the green light from the state attorney general.