Bracing for the fallout from weed tax suspension

When voters approved Proposition 64 and legalized adult use of marijuana in the state, there was hope that the illegal market would cease to exist and tax dollars would flow into the state to fund youth education programs and more. Seven years later, the industry says it’s struggling to stay afloat.

In response, Assemblymember Matt Haney (D-San Francisco) introduced Assembly Bill 564, which suspends the scheduled increase in the cannabis excise tax, aiming to stabilize the industry.

Haney argues that because California threw its hat in the cannabis ring early on, as just the third state to legalize recreational marijuana use, it did not have enough data to design lasting policy. The result, he said, is a system that has failed to meet the expectations of both the cannabis businesses that pay the taxes and the social programs funded by them.

“No other essential service that the state provides has to go up and fight to raise taxes on a single product this way,” Haney said. “The way California has set this up, I think, tied these organizations and these services to the success of the legal cannabis industry, and what we were trying to do here is stabilize it and help it grow.”

Since 2021, the wholesale price of cannabis has steadily decreased, despite an uptick in consumer demand, according to a 2024 California Cannabis Market Outlook report prepared by ERA Economics for the state Department of Cannabis Control (DCC). With prices falling, legal dispensaries say profitability has become increasingly difficult.

Kevin McCarty, compliance director for KOLAS Weed Dispensary, said that an oversupply of product has led to a “price war.”

“The only thing that we can do as an industry and as a retailer is try and be as competitive as possible,” McCarty said. “Everyone’s dropping their prices and margins down to rock bottom. There’s an oversupply of various materials coming in, so everybody’s kind of struggling to survive.”

In 2022, lawmakers passed Assembly Bill 195, another tax-reform measure meant to keep California’s legal cannabis market alive. The law eliminated the cultivation tax — a tax on every ounce of cannabis harvested — and shifted the 15 percent excise tax from distributors to retailers to simplify the system.

“Everyone’s dropping their prices and margins down to rock bottom. There’s an oversupply of various materials coming in, so everybody’s kind of struggling to survive.”

To make sure youth, environmental, and community programs created under Proposition 64 didn’t lose money, AB 195 also required the California Department of Tax and Fee Administration (CDTFA) to review revenues and, if needed, raise the excise rate to as high as 19 percent starting July 2025.

In May, the CDTFA announced that it would move forward with that increase. Gov. Gavin Newsom signed AB 564 in September, suspending the hike and keeping the rate at 15 percent until June 2028.

McCarty said legal retailers are locked in an uneven contest against unregulated sellers who don’t pay taxes or testing costs. Illicit sales of cannabis still account for 60 percent of the market, according to the DCC. He warned that each tax increase pushes more consumers toward that illicit market, shrinking the state’s total revenue rather than growing it.

Labor leaders share that concern. Kristen Heidelbach, a legislative director with the United Food and Commercial Workers Union, stated that the union supports AB 564 to protect jobs for cannabis workers who transition from the underground economy to the legal one. She noted that when employers fail, union members lose hours and benefits, creating instability for families who rely on those paychecks.

Industry and labor backers also point to local and sales taxes that stack on top of the state excise levy, bringing the effective rate consumers pay to between 35 and 45 percent in some jurisdictions. They argue that the combined burden makes legal cannabis too expensive to compete with unlicensed sellers.

“If you have fewer and fewer people purchasing in the legal market and operating in the legal market… that product is not tested. It’s also not putting taxes into the woefully underfunded Cannabis Tax Fund,” Heidelbach said.

For organizations that depend on that fund, however, Haney’s relief package feels like a retreat from Proposition 64’s intent. The CDTFA estimates that this bill would result in reduced cannabis excise revenues of $135 million in 2025 through 2026.

At Child Action, Inc. in Sacramento, Legislative Director Heidi Keiser said her organization receives funding through Proposition 64 revenues to help low-income families afford childcare. More than 5,000 eligible children are on waiting lists for subsidized slots, and she fears that pausing the tax increase will widen that gap.

“These cuts might fall hardest on our low-income families,” she said, adding that their programs prioritize foster children, survivors of domestic violence and families experiencing homelessness.

The Sacramento LGBT Community Center faces a similar issue. Through the Elevate Youth California grant program, funded by cannabis tax revenue, the center hosts a South Sacramento youth leadership program that serves participants aged 14 to 26 years old. The internship educates young people to organize and lead civic projects in communities affected by the war on drugs.

Romel Antoine, the center’s director of advocacy and training, said the funding “accomplished a lot of things at once,” providing jobs, education and leadership opportunities for young people who might otherwise be excluded. However, with the freeze in place, he expects future funding to decrease.

“We’re not the well-funded industry that works in the way that the cannabis folks do…”

Advocates, such as Jim Keddy, founder of the nonprofit Youth Forward, argue that the state has already walked away from the “revenue-neutral” commitment it made when it passed AB 195. Removing the cultivation tax, he said, reduced the amount available for youth and community grants, and pausing the excise increase goes even further.

Keddy contends that the well-organized cannabis lobby has succeeded in weakening the funding stream that was supposed to balance legalization’s social costs. “We’re not the well-funded industry that works in the way that the cannabis folks do,” Keddy said.

Haney acknowledges the trade-offs but maintains that AB 564 is about preserving the foundation of the system, not dismantling it. He said raising taxes on a declining market would have accelerated business closures and, in the long run, hurt the very programs critics want to protect.

“It seemed to me that the first step was not kicking these folks even more when they’re down,” he said. “The message that a big tax hike would send to small operators would have been disastrous.”

For now, the excise tax will stay at 15 percent through June 2028. Lawmakers now have three years to determine whether keeping taxes low helps stabilize the cannabis market or merely postpones larger questions about how to fund the programs promised under Proposition 64.