California lawmakers fail to include cannabis tax relief in budget bill

Faint hopes for California cannabis industry excise tax relief evaporated Wednesday when lawmakers failed to squeeze a freeze on the levy into a state budget bill.

“It would not be a budget if there weren’t things to be disappointed about,” Democratic state Sen. Christopher Cabaldon said during a budget hearing.

“I wish we had reached an agreement on the cannabis tax increase.”

Negotiations between Gov. Gavin Newsom and Democratic leaders in the Legislature over final details of a $321 billion spending package went well into the night Tuesday, according to the Los Angeles Times.

The so-called “budget trailer bill” that marks the beginning of the state’s new fiscal year represented the final opportunity to stave off an increase in California’s marijuana excise tax from 15% to 19% before it was to take effect July 1.

Governor made final push on behalf of cannabis

In a sign of the cannabis industry’s burgeoning influence among lawmakers, Newsom and state Assembly Speaker Robert Rivas supported putting an excise tax freeze in the budget trailer bill, several sources told MJBizDaily.

However, the sources said, the idea was rejected by Sen. President Pro Tempore Mike McGuire, who, coincidentally, represents California’s legacy marijuana growing region, the Emerald Triangle.

McGuire did not immediately respond to MJBizDaily requests for comment.

The chance that state’s legislative leaders and Newsom would come to terms with slipping the tax freeze into the budget trailer bill was always slim, observers said.

Doing so would have required one of two things:

• Finding another source of revenue in a down budget year, a feat made even more challenging with California finances already a mess because of the deadly January wildfires in Los Angeles as well as the Trump administration cutting promised federal funding to the blue state.
• Mollifying other powerful Sacramento lobbies’ discomfort with giving what they saw as a tax cut to a vice industry. Those lobbies represent recipients of marijuana tax revenue such as youth-serving and drug-prevention outfits.

When the tax takes effect, regulated marijuana businesses in California – still the nation’s largest market but steadily shrinking since the industry’s 2021 peak – would be among the most heavily taxed in the country, according to the Tax Foundation.

In addition to excise taxes, cannabis sales in California are subject to the state sales tax, which varies from 7.25% to 10.75%, depending on the jurisdiction, as well as any local taxes.

According to the state Legislative Analyst’s Office, increasing the excise tax will likely lead to an overall decrease in revenue as price-conscious consumers seek cheaper alternatives.

Pending bill is marijuana industry’s last gasp

Tax relief might yet be on the way for California’s cannabis operators, but at least six months of higher rates are guaranteed.

Separate legislation, introduced earlier this year by San Francisco Democratic Assembly Member Matt Haney, would freeze the excise tax at its current 15%.

Haney’s bill passed the California Assembly on a unanimous 74-0 vote on June 2 but has yet to be heard in the state Senate.

The 15% tax rate in Haney’s measure is still considered far too high to compete with the illicit market in California and boost flagging retail revenue.

But it’s far preferable to the coming increase to 19%.

The earliest that Newsom – an early adult-use legalization supporter – could sign Haney’s measure into law would be August or September.

If he does, the earliest the law could take effect as currently written is Jan. 1, 2026.

That potential delay – and the specter of six months of punishing taxes – left the budget trailer bill as the last, best opportunity to stave off the tax increase entirely.

“I’m very concerned that we’re going to see less revenue as a result of this increase than we would have without it as well as severely hampering the legal industry and significantly advantaging the illicit and illegal activities around our state,” said Cabaldon, who, along with state Sen. Scott Wiener, publicly supported putting the tax freeze in the budget bill.

“I hope we remain committed to solving this issue.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.