California suspends planned marijuana tax hike with AB 564, giving legal cannabis industry temporary relief
Governor Gavin Newsom signed AB 564, cutting California’s state cannabis excise tax to 15% through 2028 and halting a planned rise to about 19%. Effective Oct. 1, 2025, supporters say it aids legal businesses; critics cite risks to youth-program funding.
- AB 564 freezes the state cannabis excise tax at 15% through 2028 and cancels a scheduled rise to roughly 19%.
- Effective date: October 1, 2025.
- Concerns: Opponents warn the cut may reduce Prop 64‑earmarked funds for youth prevention and community programs.
- Local taxes remain: Cities and counties can still impose additional cannabis levies that AB 564 does not change.
Key information and sources
Law: AB 564 (sponsored by Assemblymember Matt Haney) temporarily sets the state cannabis excise tax at 15% through 2028 — see the governor’s office release.
Effective date: October 1, 2025 — confirmed in the governor’s release.
Change: The bill halts a scheduled increase that would have pushed the excise tax to roughly 19% of gross receipts in mid‑2025 — see the California Department of Tax and Fee Administration notice (L‑979) and LAist reporting.
Revenue and programs: Opponents warn the cut could reduce funds directed by Prop 64 for youth prevention and community services — reporting by KQED.
Local taxes: Cities and counties retain authority to levy additional cannabis taxes; AB 564 only changes the state excise tax (KQED reporting).
What AB 564 does and why lawmakers acted
AB 564 freezes the state excise tax on recreational cannabis at 15% through 2028. The excise tax is applied before sales tax and local levies, which can push the final retail price significantly higher for consumers. Supporters argue the lower state rate will help licensed shops compete with a large illicit market that frequently sells cheaper, untaxed products.
Governor’s intent: The administration framed the move as promoting “the long‑term success of the legal industry” and protecting public health by shifting customers toward regulated, tested products — see the governor’s release.
Industry pressures and the case for relief
Legal cannabis businesses and trade groups lobbied heavily for relief, pointing to the high costs of operating legally in California: licensing fees, strict regulations, mandatory testing, and layers of local taxes. Those expenses make legal products more expensive than illicit alternatives. Industry leaders say reducing the state excise tax can help small retailers and producers survive and draw customers back into the regulated market (LAist; KQED).
“Much‑needed relief” — how industry groups described the change, arguing it could mean the difference between staying open and closing for small operators.
Critics, funding trade‑offs and social programs
Opponents include more than 100 youth and environmental groups that rely on cannabis tax revenues. They warn the reduction will shrink funds for prevention, youth programs and community grants promised under Proposition 64. Prop 64 directed a large share of cannabis tax revenue — commonly cited as 60% — to youth and community services, and critics say AB 564 threatens that funding stream (KQED).
Lawmakers and the governor’s office say the bill balances relief with stepped‑up enforcement, and that some revenue will still be used to target illegal operations via tax tools and civil penalties — see the governor’s release.
Regulatory context and the scheduled increase
The rollback follows a California Department of Tax and Fee Administration notice (L‑979) that had projected an excise tax increase to roughly 19% starting July 1, 2025, under an existing formula. AB 564 stops that scheduled rise and locks the 15% rate through 2028 to give the legal market time to adjust.
Local taxes, market complexity and patchwork rules
AB 564 only changes the state excise tax. Municipalities and counties can still set local taxes on cannabis, and many already levy additional charges that add to the final retail price. That patchwork means the price gap between legal and illicit markets will vary widely across regions; in areas with high local taxes, legal products may remain much more expensive than street‑market alternatives (KQED reporting).
Enforcement and complementary measures
The Newsom administration said the tax shift will be paired with stronger enforcement to reduce illegal sales, including use of tax tools and civil penalties aimed at unlawful growers and unlicensed retailers. Supporters argue the combination of lower taxes and stepped‑up enforcement will give regulated businesses a fair chance to compete while depriving illicit sellers of advantages like avoiding taxes and testing requirements (governor’s office).
Implications for Los Angeles
Economic impact: Los Angeles hosts one of the state’s largest legal cannabis markets and a persistent illicit market. The state‑level cut could lower costs for licensed retailers across the city and county, improving margins and potentially trimming retail prices — though high local taxes in L.A. could keep final prices elevated.
Political consequences: City and county leaders will face pressure from industry advocates seeking coordinated local tax relief and from youth, health and environmental groups focused on protecting program funding. Local officials may need to weigh short‑term business relief against long‑term community investments.
Social effects: Programs for youth prevention, substance‑use education and community reinvestment that have received cannabis tax funds could face shortfalls if state revenues decline. Local nonprofits and agencies may need new funding strategies.
Practical notes for residents: Consumers in Los Angeles may see smaller price differences at licensed dispensaries depending on local levies. Residents should monitor enforcement activity and local budget decisions affecting community programs.
What to watch next in Los Angeles
- Whether the city or county will consider lowering local cannabis taxes to align with the state cut and the impact on municipal revenues.
- How quickly state and local law enforcement increases enforcement against illicit sellers and whether that reduces illegal supply.
- Budget adjustments by agencies and nonprofits that receive cannabis tax funding and contingency plans for potential shortfalls.
- Price changes at neighborhood dispensaries and any market entries or closures tied to the tax change.
Transparency, accountability and unanswered questions
Key unanswered questions remain: How much revenue will state and local governments lose? Will enforcement reduce the illicit market enough to offset revenue impacts? How will youth and prevention programs make up for lower tax proceeds? State officials have not provided a full public revenue estimate tied to AB 564 in the signing materials, and opponents are calling for clearer accounting on program impacts (KQED).
Sources and further reading
- LAist: California’s marijuana industry gets a break under new law suspending tax hike
- Governor’s Office press release: Governor Newsom signs legislation cutting taxes on cannabis
- KQED: Newsom signs bill decreasing cannabis tax, which could boost struggling industry
- California Department of Tax and Fee Administration notice (L‑979)
- Background on 2025 cannabis policy shifts
Dateline: Sacramento, California (Times Media Service)
