California's legal cannabis industry is bracing for a perfect storm of challenges as it enters the second half of 2025. A combination of rising costs, including a scheduled increase in the state excise tax, new federal tariffs on imported cannabis supplies, and a proposed ban on disposable vapes, threatens to further disadvantage legal retailers against the state's thriving illicit market.
Excise Tax Hike and Its Potential Impact
The state's 15% cannabis excise tax is set to increase on July 1, potentially rising to 19%. This tax, collected at the retail level, is adjustable to generate revenue equivalent to what the now-eliminated cultivation tax would have produced. Retailers are responsible for paying this tax to the state, regardless of whether they collect it from consumers.
Industry experts and state officials warn that when legal prices become too high, consumers may turn to the unregulated market, where products are untaxed, widely available, and potentially unsafe. Bill Jones, head of enforcement for the California Department of Cannabis Control, acknowledges that the black market is "very pervasive" and larger than the legal market.
To prevent the tax hike, Assemblymember Matt Haney (D-San Francisco) introduced AB 564, which would freeze the excise tax at 15% and eliminate the state's authority to adjust it. Caren Woodson, President of the California Cannabis Industry Association, emphasizes the importance of this legislation, stating that any increase would be "devastating to operators already on the brink."
Federal Tariffs on Imported Supplies
In addition to the excise tax hike, retailers are preparing for higher operating costs due to new federal tariffs on imported supplies. Products such as vape hardware, compost, cultivation tools, and packaging, often sourced from Chinese manufacturers, are now subject to steeper tariffs.
Bryan Gerber, CEO of Hara Supply, warns that businesses relying on imports may have to find new suppliers or pass costs on to consumers. Some brands are already preparing to raise prices to offset the tariffs, a move that may further limit the competitiveness of the legal market and embolden the illicit market.
Local Taxes and Proposed Vape Ban
Local governments in California also impose taxes on cannabis businesses. For example, the San Diego City Council recently voted to increase the tax rate for cannabis businesses from 8% to 10% as the city faces a budget deficit. This $4 million tax increase will go into effect on May 1, adding to the financial burden on legal operators.
Furthermore, AB 762, a bill proposed by Assemblymember Jacqui Irwin, seeks to ban all disposable vapes, including cannabis products. The bill defines disposable vapes as any device that isn't both rechargeable and refillable. Since current law prohibits refillable cannabis vapes, the bill would effectively ban the entire category, dealing another blow to the legal market.
The Need for a Balanced Approach
As California's legal cannabis industry faces these multifaceted challenges, it is crucial for policymakers to consider the potential unintended consequences of their decisions. While generating tax revenue and promoting public health are important goals, excessive taxation and overregulation may inadvertently strengthen the illicit market, undermining these objectives.
To create a more sustainable and equitable cannabis market, lawmakers must strike a balance between generating revenue, protecting public health, and ensuring the viability of legal businesses. This may involve reassessing tax structures, providing relief for struggling operators, and implementing sensible regulations that prioritize consumer safety without stifling innovation and competition.
By working collaboratively with industry stakeholders and considering the long-term implications of their decisions, California's policymakers can help create a thriving, well-regulated cannabis market that benefits consumers, businesses, and the state as a whole.
