California’s legal cannabis market is facing another potential tax hike that industry insiders believe could have devastating consequences.
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On July 1, 2025, the state’s cannabis excise tax is set to automatically increase from 15% to 19%, following a phased plan outlined in a 2022 legislative agreement. While this deal initially aimed to ease tax burdens by eliminating the cultivation tax, it also paved the way for gradual increases in the excise tax.
The state’s legal cannabis market has seen significant contraction over recent years, with numerous high-profile companies shutting down. Industry leaders, including Dustin Moore, co-founder of Embarc, warn that this tax hike could further destabilize the market. At a recent Benzinga conference, Moore emphasized the threat posed by an additional 4% tax on already slim margins, which he argued many retailers cannot offset due to consumers’ resistance to price hikes. "That’s 4% right out of the margins," Moore stated. "You knock 4% out of someone’s gross margin, you put them out of business."
Nicole Elliot, director of the California Department of Cannabis Control, acknowledged the issue, urging cannabis businesses to advocate collectively before legislators when the new session begins in January. Elliot emphasized the need for industry-wide lobbying efforts, noting that key policy changes often come through state budget bills, with a window for change open until July 1.
Consultant Hirsh Jain from Ananda Strategy highlighted that the tax increase originated with Governor Gavin Newsom’s office, which initially argued the move would be revenue-neutral. Jain pointed out, however, that given the ongoing struggles in California’s cannabis sector, this increase could hasten the decline of legal sales, with California set to have the highest cannabis taxes in the country by mid-2025.
Though the excise tax hike is not yet a certainty, cannabis operators would need to mount a significant legislative effort to alter the course. Jain likened the task to a “herculean effort,” similar to what was required to achieve modest tax reform in previous sessions. The current rate is already high, following adjustments made by the state Department of Tax and Fee Administration in 2020, and another hike could worsen conditions for the state’s legal cannabis industry.
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