California Cannabis Tax Set to Increase from 15% to 19%

Categories: California Business NewsCalifornia News

A modern California cannabis dispensary preparing for the upcoming tax increase.

News Summary

California is set to raise its cannabis excise tax from 15% to 19% effective July 1. This marks the highest tax rate permissible under state law amidst declining legal cannabis revenues. The decision follows a 2022 law requiring tax hikes when revenues decrease significantly. Industry representatives warn that this rise may harm legal businesses already struggling against the illicit market. Assembly Bill 564 has been introduced to halt the increase, as stakeholders grapple with the potential consequences on the economy and market sustainability.

California Cannabis Tax Set to Increase from 15% to 19% on July 1

California is poised to raise its cannabis excise tax from 15% to 19%, beginning on July 1. This tax increase marks the highest permissible rate under state law, representing a 26% increase that was confirmed by the California Department of Tax and Fee Administration during a recent cannabis advisory meeting. The decision comes amid an ongoing decline in the state’s legal cannabis market, prompting the state to adjust the tax rate in accordance with legal stipulations.

The tax increase is a direct result of a 2022 law signed by Governor Gavin Newsom, which eliminated the previous cultivation tax but mandated tax hikes when cannabis revenue experiences significant declines. Currently, the state is facing an alarming trend; legal cannabis revenue has dropped noticeably, causing numerous businesses to close their doors. Industry representatives argue that the increased cost will put even greater strain on legal operations struggling to compete against the illicit cannabis market, which does not pay such taxes.

Impact on Cannabis Industry

The cannabis sector in California is facing considerable challenges due to both high tax rates and regulatory burdens. Market statistics indicate that approximately 63% of cannabis consumed in the state comes from unlicensed sources, reflecting a persistent preference among consumers for lower-priced illegal products. These dynamics have raised fears that the tax increase will further discourage investment in the legal cannabis industry and diminish interest in applying for cannabis licenses.

Assemblymember Matt Haney from San Francisco has introduced Assembly Bill 564, intending to halt the imminent tax hike, a move that has gained traction within the Legislature. Industry leaders highlight that the already high tax rate poses significant threats to the financial viability of licensed businesses. Some experts warn that excessively burdensome taxation could lead to a collapse of the legal market, severely impacting the state’s economy.

Revenue and Future Forecast

Despite the difficulties, the cannabis excise tax has yielded considerable revenue, with an estimated $595 million reported for the fiscal year 2024. However, advocates within the industry caution that this financial influx could be jeopardized by the ongoing struggles of legal cannabis operators. The increase in the tax rate will affect the total prices consumers pay at dispensaries, leading to heightened costs that could deter customers from purchasing legally.

Experts agree that while the generated revenue is significant, the nexus of high taxation, expensive operational regulations, and illicit competition could spell trouble for legal sellers. The California Department of Tax and Fee Administration has made it clear that they are bound by law to adjust the marijuana excise tax rate unless legislative reforms are implemented.

Conclusion

As the deadline for the tax increase approaches, the future of California’s legal cannabis market hangs in the balance. Stakeholders, including business owners and state officials, are grappling with the ramifications of these fiscal policies amid an ever-changing landscape. Without intervention, the legal cannabis sector risks becoming increasingly unsustainable as it contends with the dual pressures of regulation and competition from the unregulated market.