California’s legal cannabis industry, long battered by high taxes and illicit competition, scored a major victory this week as Governor Gavin Newsom signed Assembly Bill 564 into law on September 22, 2025. The legislation, authored by San Francisco Assemblymember Matt Haney, reverses a controversial 25 percent excise tax hike that had threatened to further squeeze the state’s licensed dispensaries and cultivators. Effective October 1, the excise tax rate will drop from 19 percent back to 15 percent and remain at that level until at least June 30, 2028, offering the beleaguered industry some much-needed breathing room.
The move comes after months of mounting pressure from cannabis operators and advocates, who argued that the July 1 tax increase was pushing legal businesses to the brink. According to Cannabis Business Times, the higher rate was the result of a 2022 budget compromise designed to offset the elimination of a $161-per-pound cultivation tax, which itself had become unsustainable for growers as wholesale prices plummeted. But the excise tax hike, layered atop hefty state sales and local business taxes—often totaling more than 40 percent—was widely seen as a tipping point for many licensed operators.
"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," Governor Newsom said in a statement released Monday. His early signature ensures that the lower tax rate will take effect as planned, sparing dispensaries and consumers from months more of elevated costs.
Assemblymember Haney echoed the governor’s sentiments, emphasizing the importance of fair competition. "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. "AB 564 helps level the playing field. It protects California jobs, keeps small businesses open, and ensures that our legal cannabis market can grow and thrive the way voters intended."
The stakes are high for California’s cannabis sector, which remains the largest regulated market in the world. But despite its size, the legal market has struggled to gain ground against illicit operators. According to a March 2025 report by ERA Economics cited by Cannabis Business Times, unlicensed growers produce eight times more cannabis than their licensed counterparts and sell nearly twice as much as licensed dispensaries. The result? Only about 38 percent of cannabis consumed in California each year is taxed, leaving the state’s legal businesses fighting for survival—and the state itself missing out on significant revenue.
Legal cannabis sales in California totaled $1.94 billion in the first half of 2025, down from $2.14 billion during the same period in 2024, as reported by MJBizDaily. This decline comes amid falling wholesale prices, oversupply, and persistent competition from the illicit market. The California Department of Tax and Fee Administration projects that excise tax revenue will fall $100 million short of its 2021 peak of $680 million, a sobering indicator of the market’s contraction.
For many in the industry, the tax rollback is a lifeline. Amy O’Gorman Jenkins, executive director of the California Cannabis Operators Association, which represents more than 300 licensed operators, expressed gratitude for the governor’s action. "He understood what opponents refused to acknowledge: You can’t fund social programs with revenue that doesn’t exist," Jenkins said. "By stopping this misguided tax hike, the governor and Legislature chose smart policy that grows revenue by keeping the legal market viable instead of driving consumers back to dangerous, untested illicit products. This signing brings us closer to fulfilling Proposition 64’s promise: patients and consumers accessing safe, regulated cannabis while generating sustainable tax revenue for child care, youth prevention and public health programs."
Yet not everyone is celebrating. Public health advocates and some policy experts have voiced strong opposition to AB 564, arguing that the tax cut amounts to a giveaway to the cannabis industry at the expense of essential state programs. Dr. Lynn Silver, director of the Public Health Institute’s initiative Getting it Right from the Start, condemned the legislation in a press release: "We are profoundly disappointed that the legislature passed, and Governor Newsom chose to sign, AB 564 (Haney), siding with the cannabis industry’s false narrative of being ‘in crisis’ instead of standing with California’s children, families, and environment. In doing so, the Governor has embraced a massive tax giveaway to Big Cannabis—one that will permanently cut the legally guaranteed baseline for future annual funding for childcare, youth substance use prevention, environmental restoration, and law enforcement—the very programs Proposition 64 promised voters."
The fiscal impact is significant. The elimination of the excise tax increase is expected to create a shortfall of $200 million to $250 million annually for youth education and prevention programs, public safety, and remediation of illegal marijuana grows, according to KCRA. These programs, previously funded by cannabis tax revenue, will now require support from the state’s general fund. Critics argue this shift undermines the original intent of Proposition 64, which legalized recreational cannabis in 2016 with promises that tax revenues would support these very initiatives.
The Newsom administration, for its part, insists that supporting the legal market is essential to achieving the broader goals of cannabis legalization. The governor’s office points to recent efforts to crack down on illegal operators, including the establishment of the Unified Cannabis Enforcement Taskforce (UCETF) in 2022. This multi-agency group—comprising the Department of Cannabis Control, Department of Pesticide Regulation, Department of Toxic Substances Control, and Department of Fish and Wildlife, among others—has seized and destroyed over 317 tons (more than 635,303 pounds) of illegal cannabis valued at an estimated $890 million through nearly 230 operations. To further bolster enforcement, the state has expanded grant eligibility for local jurisdictions, especially those allowing retail access, to help counter black market cannabis and reduce burdens on legal businesses.
Looking ahead, the future of California’s cannabis excise tax will rest with the Department of Cannabis Control, which will have the authority to reconsider the rate every other year starting July 1, 2028. However, the law stipulates that the excise tax can never exceed 19 percent, providing some predictability for businesses and consumers alike.
For now, California’s legal cannabis operators can breathe a little easier, knowing that a major tax hike has been averted—at least for the next few years. Whether this measure will be enough to stabilize the market, stem the tide of illicit competition, and fulfill the promises of legalization remains to be seen. But one thing is clear: the Golden State’s cannabis policy debate is far from over, with powerful interests and high stakes on all sides.
