The cannabis tax reform measures contained in AB 195 (2022) may have eliminated the state’s cultivation tax a couple of years ago, but California’s government looks set on a course to recoup that lost cultivation tax revenue through an increase in the state’s excise tax starting in July 2025. This month, the California Legislative Analyst’s Office issued its Cannabis Tax Revenue Update for the third quarter of 2024 showing a projected shortfall of $42 million in cannabis tax revenue for the 2024-2025 fiscal year as compared with the Governor’s May 2024 revision. This projected shortfall for this fiscal year follows other years that did not yield cannabis tax revenue sufficient to meet the state’s so-called “Tier 3” funding commitments enshrined in Prop 64 and directed toward youth education and prevention, environmental restoration, and law enforcement. Given these shortfalls, under AB 195 (2022), the administration will be required to increase the cannabis excise tax up to a maximum of 19% as of the start of the new fiscal year (July 1) in an effort to recoup the cultivation tax revenue that was not collected after AB 195 eliminated that tax. In the four-and-a-half years that the cultivation tax was implemented, the state collected roughly $500 million in cultivation tax revenue, and at the time of the Legislature’s elimination of the cultivation tax, the state had been collecting on average about $35 million per quarter in cultivation tax revenue over the prior 30 months. Thus, the amount of lost cultivation tax that the administration will be statutorily compelled to recoup through an increased excise tax will likely be somewhere north of $200 million by the time the administration is required to increase the cannabis excise tax in July of next year. When the Legislative Analyst’s Office issues its next update in February 2025, we will know more about the amount of the lost cultivation tax that the state will be trying to recoup through the excise tax increase, and how aggressive an excise tax increase (up to the 19% cap) the state will be considering. Under AB 195 (2022), the administration is required to state the excise tax increase on or before May 1, ahead of the July 1 start of the 2025-2026 fiscal year.
