California Cannabis Taxes

On September 22, 2025, Governor Newsom signed AB-564 into law – legislation that reverts the States’ cannabis excise tax rate to 15%. While this is a temporary decrease that’s set to expire in 2028, it provides much needed relief to support the success of the legal industry and to help the market continue to grow. To better understand the new tax rate, DCR is sharing how cannabis taxes are set in California, and how they’re used. Read on for more information. 

AB-564 & Effective Dates of Rate Change

Starting on October 1, 2025, and until June 30, 2028, the States’ cannabis excise tax rate is set at 15%. However, the bill also requires the rate be reevaluated and adjusted every two years, starting in the 2028-29 fiscal year. 

On or before May 1, 2028, and each May 1 every two years after, the California Department of Tax and Fee Administration (CDTFA) must evaluate and adjust the cannabis excise tax rate by a percentage that will generate revenue to offset a previous elimination of the cannabis cultivation tax. The rate cannot exceed 19%. 

The Cultivation Tax & Rate Adjustments

When Proposition 64 passed in 2016, the original language contained two State taxes on cannabis - a 15% retail excise tax and a weight-based cultivation tax. The cultivation tax brought in considerable revenue for the State, but was also considered a heavy tax burden on cultivators. This led to the introduction and passage of AB-195 in 2022; legislation that eliminated the State’s cultivation tax and instead called for adjusting the cannabis excise tax rate periodically to make up for the revenue loss. This is the reason the excise tax rate increased to 19% on July 1, 2025, as it was one of the main provisions of AB-195. 

Cannabis Revenue Allocations

Proposition 64 also contains specific provisions on how cannabis tax revenue is distributed. All cannabis State tax revenue is deposited into the California Marijuana Tax Fund and is dispersed in a specific order from Tier 1-3. 

Tier 1: Reimbursement

The first allocation covers all costs incurred by California State agencies responsible for implementing cannabis laws, including the California Tax and Fee Administration (CDTFA), the Department of Cannabis Control (DCC), and reasonable costs incurred by the California Department of Fish and Wildlife, the State Water Resources Control Board, and the Department of Pesticide Regulation for carrying out their environmental protection duties, among others. 

Tier 2: Funding specific programs

The second tier allocates funding as follows:

• $10 million to public university research on the implementation and effect of legal cannabis and recommendations to the Legislature and Governor on potential law changes.
• $50 million to the Governor’s Office of Business and Economic Development to administer a community reinvestment grant program. This program was originally allocated $10 million in funding during its first year (2018-19) and subsequently received an additional $10 million each fiscal year until reaching a total yearly disbursement of $50 million.
• $3 million to the California Highway Patrol to adopt protocols to determine if a driver is operating a vehicle while impaired.
• $2 million to the UC San Diego Center for Medicinal Cannabis Research to advance the understanding of the efficacy and adverse effects of cannabis as a pharmacological agent. 

Tier 3: Sub-trust accounts

After Tier 1 & 2 allocations are made, all remaining revenue is divided as follows:

• 60% to the Youth Education, Prevention, Early Intervention and Treatment Account to be disbursed for programs for youth education and substance use prevention.
• 20% to the Environmental Restoration and Protection Account to be disbursed to the California Department of Fish and Wildlife and the State Department of Parks & Recreation to restore watersheds damaged by cannabis cultivation, maintain state-owned wildlife habitat areas, and fund watershed enforcement programs.
• 20% to the State and Local Government Law Enforcement Account and disbursed for California Highway Patrol training programs and the Board of State and Community Corrections for local government grants to assist law enforcement, fire protection, and other programs to address public health and safety concerns associated with Proposition 64. 

Funding for all of the above programs and sub-trust accounts are directly tied to cannabis State tax revenue, one of the many calculations that need to be considered when making an adjustment of cannabis tax rates. For more information on cannabis taxes and for questions about AB 564 and its implementation, visit the CDTFA website or reach out to them.