Tax Burden and Illegal Competition Push California Cannabis to the Brink

The legal cannabis market in Los Angeles is currently grappling with significant financial pressures, including high local taxes, a growing collective tax debt owed by retailers, and intense competition from unlicensed operations. Adding to the industry's concerns is an imminent increase in the state cannabis excise tax rate, although a proposed state bill seeks to delay this adjustment. These issues were prominently highlighted at a recent Los Angeles Cannabis Regulation Commission meeting, which ended abruptly before scheduled discussions on potential solutions could occur.

Licensed cannabis operators in Los Angeles face a combined tax burden that some reports indicate exceeds 40% when state and local taxes are considered. This heavy taxation, coupled with the costs of regulatory compliance, is cited as a major factor hindering the viability of legal businesses. Speakers at the Los Angeles Cannabis Regulation Commission meeting on Thursday, May 15, 2025, described current tax rates as making it "mathematically impossible" for compliant businesses to survive. The same speakers reported a collective tax debt among licensed retailers exceeding $280 million. Some indicated they were considering withholding tax payments due to the severe financial burden.

Further exacerbating the challenges for legal businesses is the perceived lack of adequate enforcement against unlicensed cannabis businesses operating freely without paying taxes or facing compliance costs. This unregulated market undermines the goals of legalization and poses public health risks by driving consumers to untested products.

The struggles are particularly acute for participants in the city's Social Equity Program, which was intended to provide opportunities for communities harmed by past drug policies. Despite early promises, social equity operators often faced long delays in licensing, significant upfront costs like rent before opening, and challenges in accessing intended support. Some social equity business owners report being on the verge of failure, owing substantial amounts in taxes. The program has been criticized as largely unsuccessful in achieving its restorative goals, partly due to the overall tax burden and city policies.

Upcoming State Tax Increase

Adding another layer of complexity, the California Department of Tax and Fee Administration (CDTFA) has announced that the state cannabis excise tax rate is scheduled to increase effective July 1, 2025. The current rate, in effect since January 1, 2023, is 15 percent of the gross receipts of retail sales.

Existing law requires the CDTFA, in consultation with the Department of Finance, to adjust the cannabis excise tax rate every two years, beginning in the 2025–26 fiscal year. This adjustment is meant to generate an amount of revenue equivalent to what would have been collected from the cultivation tax, which was discontinued on July 1, 2022. The law mandates that the adjusted rate cannot exceed 19% of gross receipts.

The CDTFA has determined that based on their calculation, the required adjustment for the 2025-26 fiscal year exceeds 19 percent, leading to the rate being set at the maximum of 19 percent effective July 1, 2025.

Contentious Regulatory Meeting

The significant financial strain and regulatory issues were central to the public comments presented at the Los Angeles Cannabis Regulation Commission meeting on May 15, 2025. Licensed operators voiced extensive criticisms, focusing heavily on taxation, tax debt, lack of enforcement, and perceived shortcomings in the Department of Cannabis Regulation (DCR) processes and the Social Equity Program.

Specific issues raised during public comment included:

• Characterization of city cannabis tax rates as excessively high, hindering viability.
• Reporting of a collective tax debt exceeding $280 million owed by licensed retailers.
• Claims that current tax rates make it "mathematically impossible" for compliant businesses to survive.
• Calls for substantial tax rate reductions and indications that some operators were considering withholding tax payments.
• Criticism of the city's perceived failure to adequately enforce regulations against unlicensed businesses.
• Concerns about the DCR's licensing and modification processes being overly complex and inefficient.
• Opposition to proposed fee increases, viewed as unjustified given perceived DCR shortcomings.
• Description of the Social Equity Program as largely unsuccessful, with challenges attributed to city policies like the tax burden.

The meeting experienced emotional testimony regarding financial hardship and debt. However, as the Commission began discussing scheduled agenda items after public comment, the meeting was abruptly adjourned at 3:31 p.m. due to disruptive behavior from a public speaker and formal intervention by the City Attorney. As a result, scheduled departmental reports and discussions on critical issues raised, including taxation and enforcement, were not held.

Legislative Efforts to Address Tax Burden

In response to the industry's struggles, legislative efforts are underway at both the state and local levels to address the tax burden.

At the state level, Assembly Bill No. 564 (AB 564), introduced by Assembly Member Haney, is under consideration in the California Legislature. As amended on May 7, 2025, this bill proposes to delay the requirement for the CDTFA to adjust the cannabis excise tax rate from the 2025–26 fiscal year to the 2030–31 fiscal year. If enacted, this bill would effectively retain the current 15% cannabis excise tax rate for a longer period than mandated by existing law. The bill is currently in the 2025-2026 regular session.

According to a recent article by SFGATE a motion has been circulated by Los AngelesCity Councilmember Curren Price proposing city-level relief. This motion seeks to create a program for tax debt forgiveness for liabilities incurred due to licensing delays, systemic barriers, and unregulated market encroachment. It also proposes establishing a tiered local tax system that would offer a lower tax rate for social equity store owners. The motion's potential for becoming law remains uncertain.