California’s legal cannabis industry could be in for a brutal 2025. The state is considering increasing the licensing fees for legal businesses, right as a 25% tax increase looms in July.The great irony is both cost hikes are in play precisely because the legal market is in such dire financial shape.The state is legally required to update the cannabis excise tax rate in July of this year to make up for lackluster cannabis tax collections due to lower-than-expected sales. While the new rate hasn’t been determined yet, it’s widely expected to increase from 15% to 19% due to stipulations in state law.Meanwhile, the state’s Department of Cannabis Control, or DCC, is facing a $23 million budget deficit this year. The looming shortfall has left the agency considering raising licensing fees, a core part of its revenue, thus charging pot companies more to participate in the legal market. Caren Woodson, the president of the California Cannabis Industry Association, said in an email to SFGATE that increasing the costs of running a legal business would be “catastrophic to the industry” and drive customers back into the illicit market, which continues to thrive in California. “The current model keeps one foot in regulation and one in prohibition, with dollars going in both directions. We must act swiftly to course correct or California’s legal, regulated market will continue to face the risk of an extinction event,” Woodson wrote.Amy O’Gorman Jenkins, the executive director of the California Cannabis Operators Association, told SFGATE in an email that a tax increase in particular poses an “existential threat” to the industry.“The truth of the matter is that for many operators large and small, increased costs represent a tipping point that could mean closed doors and surrendered licenses,” O’Gorman Jenkins said.July 1 tax increaseThe impending cannabis excise tax increase is thanks to a 2022 deal brokered between Democrats in the legislature and Gov. Gavin Newsom’s administration. The agreement dropped a widely loathed cannabis cultivation tax in exchange for guaranteeing that overall tax collections wouldn’t be reduced. Lawmakers agreed to eliminate that cannabis cultivation tax — which was widely blamed for making legal weed more expensive than illicit cannabis — in exchange for moving the excise tax collections from the wholesale level to the point of sale. That meant taxing the higher retail price instead of the lower wholesale price, which translated to an inherent increase in the tax. Lawmakers expected this increase to offset any revenue lost from removing the cultivation tax. Then, to make sure the tax was revenue-neutral, lawmakers added a provision that forces the state to increase the current 15% excise tax rate to up to 19% after two years if cannabis tax revenue does not cover what would have been collected through the rescinded cultivation tax. The deal went into effect July 1, 2023, making this coming July 1 the increase deadline.If legal cannabis sales were thriving and tax collections were flowing into state coffers, the state wouldn’t be forced to increase pot taxes, because the excise tax would be covering the lost revenue from the rescinded cultivation tax. Instead, California’s legal cannabis market has contracted by over 20% in the last two years, and state tax collections have plummeted. Many cannabis businesses can’t even afford to pay the existing taxes, with the state recently estimating that it is owed $1.3 billion in excise taxes and penalties for missed tax payments.The California Department of Tax and Fee Administration is expected to announce the new tax rate later this winter, prior to it going into effect on July 1, but the governor’s latest budget proposal has already baked in a tax increase, according to Seth Kerstein, a senior economist at the California Legislative Analyst’s Office.“Although we do not yet know for sure what the new tax rate will be, we expect it to be at or near the statutory cap of 19%,” Kerstein said in an email to SFGATE. Some interest groups that depend on cannabis tax revenue for government programs have already called for the tax rate to increase in the hopes that it provides more funds to the state, but the cannabis industry has united around opposing any increase, arguing it will make legal cannabis more expensive and run legal pot companies into the ground. In fact, O’Gorman Jenkins’ industry group was founded this year with that as its top priority. She told SFGATE by email that raising the taxes would just further decrease legal sales and create a “vicious cycle” in which the legal market further contracts, and customers go to the illicit market.Potential fee increaseThe tax increase is already baked into state law, but the licensing fee hike remains a looming threat — albeit a big one.The DCC is funded primarily through the fees legal businesses pay to acquire a state license, yet there are not enough businesses entering the legal market to generate the necessary funds to support the department fully. As a result, the agency is looking at a $23 million deficit this year, and considering increasing fees on businesses to make up the gap, according to a DCC presentation given during a December advisory meeting.DCC spokesperson David Hafner said in an email to SFGATE that the agency has not officially proposed increasing the licensing costs. He acknowledged that the department is facing a budget shortfall, and also pointed out that licensing fees have not been increased since the department was formed in 2021.“The Department is currently projected to be solvent for this fiscal year. However, annual expenditures exceed annual revenue for the Cannabis Control Fund, which is the primary funding source for the Department,” Hafner wrote. Cannabis businesses already pay fees that are exponentially higher than their counterparts in the alcohol industry. State licensing fees for a beer producer are $2,385, no matter how big the operation, and a winemaker could license a 10-acre vineyard for less than a thousand dollars. Meanwhile, a state license for a 1-acre indoor cannabis farm costs over $85,000. The DCC has never earned more revenue from fees than it has spent, according to an SFGATE analysis of previous budget documents. The agency does have an $82.7 million backstop of cash, although that is down from a high of $169.1 million since the 2021-22 fiscal year. The Legislative Analyst’s Office said last year in a report that “it will be important for the Legislature to closely monitor the Cannabis Control Fund’s revenues and expenditures going forward to ensure it maintains a healthy fund balance.” The possibility of raising licensing fees has been widely criticized by leaders in the legal industry, who say that any increase in licensing costs will either increase the costs of legal goods or cut out the profit from legal companies, both of which would force more businesses to close.“We’re facing a stark reality, where businesses are struggling to break even, much less turn a profit,” said Woodson, the president of the California Cannabis Industry Association.There appears to be at least some interest in the legislature in avoiding both the tax and fee increase. Matt Haney, a Democratic assemblymember from San Francisco, told SFGATE in January that any increase in taxes or fees would likely drive businesses owners out of the legal market. “I definitely understand the regulatory authority needs more resources, but that can’t be at the expense of putting out businesses that are already hanging on by a thread,” Haney said.See more coverage of top Central Coast stories | Download our app / Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel
, Calif. —
California’s legal cannabis industry could be in for a brutal 2025. The state is considering increasing the licensing fees for legal businesses, right as a 25% tax increase looms in July.
The great irony is both cost hikes are in play precisely because the legal market is in such dire financial shape.
The state is legally required to update the cannabis excise tax rate in July of this year to make up for lackluster cannabis tax collections due to lower-than-expected sales. While the new rate hasn’t been determined yet, it’s widely expected to increase from 15% to 19% due to stipulations in state law.
Meanwhile, the state’s Department of Cannabis Control, or DCC, is facing a $23 million budget deficit this year. The looming shortfall has left the agency considering raising licensing fees, a core part of its revenue, thus charging pot companies more to participate in the legal market.
Caren Woodson, the president of the California Cannabis Industry Association, said in an email to SFGATE that increasing the costs of running a legal business would be “catastrophic to the industry” and drive customers back into the illicit market, which continues to thrive in California.
“The current model keeps one foot in regulation and one in prohibition, with dollars going in both directions. We must act swiftly to course correct or California’s legal, regulated market will continue to face the risk of an extinction event,” Woodson wrote.
Amy O’Gorman Jenkins, the executive director of the California Cannabis Operators Association, told SFGATE in an email that a tax increase in particular poses an “existential threat” to the industry.
“The truth of the matter is that for many operators large and small, increased costs represent a tipping point that could mean closed doors and surrendered licenses,” O’Gorman Jenkins said.
July 1 tax increase
The impending cannabis excise tax increase is thanks to a 2022 deal brokered between Democrats in the legislature and Gov. Gavin Newsom’s administration. The agreement dropped a widely loathed cannabis cultivation tax in exchange for guaranteeing that overall tax collections wouldn’t be reduced.
Lawmakers agreed to eliminate that cannabis cultivation tax — which was widely blamed for making legal weed more expensive than illicit cannabis — in exchange for moving the excise tax collections from the wholesale level to the point of sale. That meant taxing the higher retail price instead of the lower wholesale price, which translated to an inherent increase in the tax. Lawmakers expected this increase to offset any revenue lost from removing the cultivation tax.
Then, to make sure the tax was revenue-neutral, lawmakers added a provision that forces the state to increase the current 15% excise tax rate to up to 19% after two years if cannabis tax revenue does not cover what would have been collected through the rescinded cultivation tax. The deal went into effect July 1, 2023, making this coming July 1 the increase deadline.
If legal cannabis sales were thriving and tax collections were flowing into state coffers, the state wouldn’t be forced to increase pot taxes, because the excise tax would be covering the lost revenue from the rescinded cultivation tax. Instead, California’s legal cannabis market has contracted by over 20% in the last two years, and state tax collections have plummeted. Many cannabis businesses can’t even afford to pay the existing taxes, with the state recently estimating that it is owed $1.3 billion in excise taxes and penalties for missed tax payments.
The California Department of Tax and Fee Administration is expected to announce the new tax rate later this winter, prior to it going into effect on July 1, but the governor’s latest budget proposal has already baked in a tax increase, according to Seth Kerstein, a senior economist at the California Legislative Analyst’s Office.
“Although we do not yet know for sure what the new tax rate will be, we expect it to be at or near the statutory cap of 19%,” Kerstein said in an email to SFGATE.
Some interest groups that depend on cannabis tax revenue for government programs have already called for the tax rate to increase in the hopes that it provides more funds to the state, but the cannabis industry has united around opposing any increase, arguing it will make legal cannabis more expensive and run legal pot companies into the ground. In fact, O’Gorman Jenkins’ industry group was founded this year with that as its top priority. She told SFGATE by email that raising the taxes would just further decrease legal sales and create a “vicious cycle” in which the legal market further contracts, and customers go to the illicit market.
Potential fee increase
The tax increase is already baked into state law, but the licensing fee hike remains a looming threat — albeit a big one.
The DCC is funded primarily through the fees legal businesses pay to acquire a state license, yet there are not enough businesses entering the legal market to generate the necessary funds to support the department fully. As a result, the agency is looking at a $23 million deficit this year, and considering increasing fees on businesses to make up the gap, according to a DCC presentation given during a December advisory meeting.
DCC spokesperson David Hafner said in an email to SFGATE that the agency has not officially proposed increasing the licensing costs. He acknowledged that the department is facing a budget shortfall, and also pointed out that licensing fees have not been increased since the department was formed in 2021.
“The Department is currently projected to be solvent for this fiscal year. However, annual expenditures exceed annual revenue for the Cannabis Control Fund, which is the primary funding source for the Department,” Hafner wrote.
Cannabis businesses already pay fees that are exponentially higher than their counterparts in the alcohol industry. State licensing fees for a beer producer are $2,385, no matter how big the operation, and a winemaker could license a 10-acre vineyard for less than a thousand dollars. Meanwhile, a state license for a 1-acre indoor cannabis farm costs over $85,000.
The DCC has never earned more revenue from fees than it has spent, according to an SFGATE analysis of previous budget documents. The agency does have an $82.7 million backstop of cash, although that is down from a high of $169.1 million since the 2021-22 fiscal year. The Legislative Analyst’s Office said last year in a report that “it will be important for the Legislature to closely monitor the Cannabis Control Fund’s revenues and expenditures going forward to ensure it maintains a healthy fund balance.”
The possibility of raising licensing fees has been widely criticized by leaders in the legal industry, who say that any increase in licensing costs will either increase the costs of legal goods or cut out the profit from legal companies, both of which would force more businesses to close.
“We’re facing a stark reality, where businesses are struggling to break even, much less turn a profit,” said Woodson, the president of the California Cannabis Industry Association.
There appears to be at least some interest in the legislature in avoiding both the tax and fee increase. Matt Haney, a Democratic assemblymember from San Francisco, told SFGATE in January that any increase in taxes or fees would likely drive businesses owners out of the legal market.
“I definitely understand the regulatory authority needs more resources, but that can’t be at the expense of putting out businesses that are already hanging on by a thread,” Haney said.
See more coverage of top Central Coast stories | Download our app / Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel