California Can't Tax Its Way Out of the Cannabis Crisis

By Amy O'Gorman Jenkins

California's two largest cities are making a costly mistake. 

As legal cannabis sales plummet and dispensaries shutter across Los Angeles and San Diego, local officials are responding by hiking taxes and fees on the struggling industry. 

The numbers tell a stark story. In San Diego, cannabis tax revenue has dropped from $24.6 million in 2022 to $14.7 million in 2024 (40% decline), forcing the city to scale back community programs. Los Angeles is watching its legal cannabis market hemorrhage businesses while the illicit trade thrives. Yet instead of addressing root causes, both cities are doubling down on failed tax policies that push consumers toward unregulated dealers and unsafe products.

This local crisis mirrors a statewide emergency. Since Q2 2021, California's legal cannabis sales have declined by over 30%, while excise tax revenue is down 22% since FY 2023-24, resulting in hundreds of millions of dollars in annual cannabis tax revenue losses (CTDFA).

More than 12,000 cannabis licenses have been surrendered or allowed to expire, more than the number of active permits remaining (DCC). The industry has shed thousands of jobs, with small family farms, equity operators, and local manufacturers bearing the brunt of this collapse (Vangst/DCC).

Now California faces a critical choice. 

The state's cannabis excise tax has recently increased from 15% to 19%, a devastating 25%+ hike felt by customers and patients at the register. Assembly Bill 564, authored by Assemblymember Matt Haney, offers the only viable path forward. By stopping the tax hike, AB 564 protects both public health and the community programs that rely on cannabis tax revenue for essential services.

Critics argue that stopping the tax increase means fewer dollars for the community programs that rely on the revenue. But this fundamentally misunderstands how tax policy works. In a shrinking market, raising taxes drives more customers to untaxed illicit sellers, and that means less revenue, not more.

And we’re seeing that play out in real-time.

When Michigan, with just one-quarter of California's population, not outsells us in legal cannabis, it's not because they grow better products. It's because they've embraced tax policies that keep consumers in the regulated market rather than driving them to illicit dealers.

California's licensed businesses already face crushing taxes. State excise, sales, and local taxes and fees can push the total tax burden as high as 40-50%. No legal business can compete with illicit dealers offering the same products at half the price and tax-free.

Research from Reason Foundation shows that even a 1% increase in price can send consumers to the unregulated market, and when Californians flee the legal market, everyone loses.

Let’s be clear, the illicit market isn't just thriving: it's exploding. Illegal operators control over 60% of statewide cannabis sales, and their cultivation outpaces legal growers 8:1 (DCC).

AB 564 enjoys bipartisan support from the Assembly and Governor Gavin Newsom because it isn't a taxpayer-funded bailout or corporate welfare. It's a recognition that sustainable tax policy requires a sustainable industry. Stopping the tax hike gives legal businesses a fighting chance to compete with illicit dealers and maintain robust tax revenue for community programs.

California pioneered cannabis legalization with the promise of creating a safe, regulated marketplace that would displace dangerous illegal dealers. Proposition 64 mandated explicitly that cannabis be “taxed in a way that drives out the illicit market.” We're failing that mandate spectacularly.

The choice is clear: support sustainable tax policy that protects communities, consumers, and public safety, or watch California's legal cannabis market disappear entirely, taking community programs and tax revenue down with it.

Learn more and take action: cacoa.org/dont-raise-taxes