California Suspends Cannabis Tax Hike to Aid Legal Market Viability

23 September

California Governor Gavin Newsom has signed a new law on September 23 that suspends a planned excise tax hike on recreational cannabis reverting the rate from the recently raised 19 percent back down to 15 percent until 2028 in a bid to support dispensaries and reduce pressure from illegal competitors.

The tax increase had been imposed earlier this year under legislation that tied cannabis excise levies to sales as part of an agreement with marijuana companies aimed at raising funding for social programs as specified in the 2016 ballot measure that legalized recreational use. Many in the industry argued that the higher rate was squeezing legal operators who already face heavy regulatory burdens and fierce competition from the illicit market.

Those in favor of the rollback say it will help the legal market catch up. Taxable cannabis sales have dropped from their 2021 peak of over $1.5 billion in Q2 to about $1.2 billion, highlighting challenges in price, profit margins, and enforcement. Legal sales today account for roughly 40 percent of all weed consumption in the state, according to California’s Department of Cannabis Control, leaving much demand still met by unlicensed sources.

Governor Newsom said the rollback is intended to help the legal industry grow consumers access safe products and give local communities a chance to see long-term economic benefits. He framed the change as smart policy that encourages competition in favor of public health and regulation instead of driving consumers back to untested illicit markets.

Industry voices like Amy O’Gorman, executive director of the California Cannabis Operators Association, welcomed the law saying that keeping the legal market viable has been difficult with thin margins especially given compliance costs, regulatory requirements, and maintaining safe standards.

Some nonprofit organizations however are critical. Grants for social services, low-income children, substance abuse programs and environmental protection that rely on the revenue generated by the excise tax could see reduced funding because of the rollback. In regions such as the Emerald Triangle in Northern California, environmental groups caution that fewer resources may compromise efforts to manage the environmental harms associated with illegal grows.

Legal experts note that while this move brings temporary relief, the state still faces structural obstacles. Regulatory oversights, licensing delays, costs of cultivation under strict rules, and competition from illicit operations continue to limit profitability and market share.

Supporters of the rollback propose that over time legal operators could reinvest savings into better supply chain management, compliance enforcement, product safety, and community reinvestment programs to strengthen public confidence in regulated cannabis.

Critics argue the rollback amounts to kicking the can down the road rather than addressing underlying issues such as taxation complexity, market inequities, and enforcement of illicit trade. Some say longer-term planning is needed to protect both industry stability and environmental and social priorities.

The temporary nature of the rollback until 2028 means that the industry will need to lobby for either a further extension or adjustments to tax structure beyond that. Meanwhile many in the cannabis sector are hoping the measure will reduce cost pressures and help reclaim lost market share from illegal suppliers.

California’s experiment in balancing tax revenue, public safety, ecological protection and market fairness will likely serve as a case study for other states wrestling with similar tensions in cannabis regulation.