After months of legislative battles and industry advocacy, Assembly Bill 564 has finally landed on Governor Gavin Newsom’s desk following a unanimous 76-0 Assembly vote. The bill, which would pause California’s cannabis tax hike for five years, now awaits the governor’s signature—a decision that could determine the fate of the state’s struggling legal cannabis market.

The stakes couldn’t be higher. California’s cannabis industry faces mounting pressure from increased taxation, regulatory burdens, and competition from the illicit market. With the excise tax jumping from 15% to 19% in July 2024, legal operators have watched their competitive edge erode further. AB 564 is more than just tax relief—it’s a lifeline for an industry that generates millions in state revenue while supporting thousands of jobs.

Governor Newsom now has until October 12 to decide whether to sign the measure into law. His choice will reveal whether California’s leadership prioritizes short-term tax revenue over long-term industry sustainability. More importantly, it will test whether the governor follows through on his previous commitments to support cannabis tax relief.

From Budget Battles to Standalone Success

AB 564’s path to the governor’s desk highlights the complex politics surrounding cannabis taxation in California. Initially, advocates hoped tax relief would be included in the state budget, with Governor Newsom expressing support for a tax freeze in the trailer bill. Assembly Speaker Robert Rivas also backed the delay, creating optimism for swift action.

However, Senate President Pro Tempore Mike McGuire reportedly blocked the measure from budget legislation, forcing supporters to pursue the standalone bill route. This political maneuvering cost valuable time as operators continued struggling under the increased tax burden throughout the summer months.

The bill’s unanimous passage through both chambers demonstrates rare bipartisan recognition that California’s cannabis tax policy needs immediate correction. Assemblymember Matt Haney, who authored the legislation, emphasized the bill’s purpose: “The bill will provide immediate tax relief to California’s struggling cannabis industry by reversing an unprecedented 25 percent excise tax increase.”

What AB 564 Would Accomplish

If signed, AB 564 would reduce the cannabis excise tax from its current 19% back to 15%, effective October 1, 2024, and maintain that rate through June 30, 2030. This five-year relief period provides operators with predictable tax obligations while allowing the industry time to stabilize and grow.

The legislation includes important accountability measures requiring the California Department of Tax and Fee Administration to submit annual reports documenting revenue impacts from the rate reduction. These reports will help legislators assess whether lower taxes successfully strengthen the legal market without creating unacceptable revenue losses.

The bill also establishes a framework for future tax adjustments based on revenue equivalency to the discontinued cultivation tax. This approach attempts to balance industry relief with state fiscal needs, creating a more sustainable long-term taxation model.

The Governor’s Previous Commitments

Governor Newsom’s decision on AB 564 carries particular significance given his previous statements supporting cannabis tax relief. His advocacy for including tax freezes in budget legislation demonstrated recognition that excessive taxation threatens the legal cannabis market’s viability.

During budget negotiations, the governor’s office acknowledged that high tax rates drive consumers toward the illicit cannabis market. These concerns haven’t disappeared—if anything, they’ve intensified as operators report continued difficulties competing with unregulated competitors.

The governor’s signature would align his actions with his stated policy positions while demonstrating leadership on an issue affecting thousands of California businesses and employees. Conversely, a veto would contradict his previous advocacy and leave the industry without relief during a critical period.

Industry Impact and Stakeholder Perspectives

California’s legal cannabis operators view AB 564 as essential for market survival. The 4% tax increase implemented in July created immediate pricing pressures, forcing businesses to choose between absorbing costs that threaten profitability or raising prices that drive customers to illicit competitors.

Local jurisdictions have compounded these challenges with their own fee increases. Los Angeles County recently approved substantial licensing fee hikes, with renewal fees jumping nearly 50%. These cumulative taxes create a taxation environment that many operators describe as unsustainable.

Retail operators particularly benefit from excise tax relief since they directly face consumer price sensitivity. Many report that tax-driven price increases immediately impact sales volume, creating a direct correlation between taxation levels and business viability.

AB 564’s importance extends beyond simple tax relief—it represents a critical tool for combating California’s persistent illicit cannabis market. Unregulated operators avoid all compliance costs, testing requirements, and taxation, allowing them to undercut legal businesses significantly.

The July tax increase widened this pricing gap, making legal cannabis even less competitive. Industry analysts estimate that excessive taxation drives 30-40% of California cannabis purchases to illicit markets, representing hundreds of millions in lost legal sales and tax revenue.

Reducing the excise tax to 15% wouldn’t eliminate the pricing advantage of illicit operators, but it could narrow the gap sufficiently to keep more consumers in the legal market.

Newsom’s Decision Timeline For AB 564

Governor Newsom has until October 12 to act on AB 564, giving him several weeks to consider the measure’s implications. His decision will influence not only California’s cannabis industry but also set precedents for how states balance taxation with market development in emerging industries.

The governor faces competing pressures from fiscal conservatives who prioritize tax revenue and industry advocates who emphasize market sustainability. However, the bill’s unanimous legislative passage suggests broad consensus that current tax levels are counterproductive.

Political considerations also factor into the decision. Supporting AB 564 would reinforce Newsom’s image as a progressive leader willing to support emerging industries, while a veto might appear inconsistent with his previous advocacy for tax relief.

The Stakes for California Cannabis

AB 564 represents more than a single policy decision—it’s a test of California’s commitment to nurturing the legal cannabis market it created through voter approval of Proposition 64. The governor’s choice will signal whether the state prioritizes sustainable industry development or short-term revenue maximization.

A signature would provide immediate relief to struggling operators while demonstrating that California’s leadership understands the delicate balance required to maintain a competitive legal market. The five-year relief period would offer stability for business planning while generating data to inform future policy decisions.

Governor Newsom now plays a key role in shaping the future of California’s cannabis industry. His decision will determine whether the state’s legal operators receive the support they need to compete effectively, or whether they’ll continue struggling under a tax burden that benefits no one—not consumers, not businesses, and ultimately, not the state itself.

The cannabis industry, advocates, and stakeholders across California await the governor’s decision. Will he sign AB 564 and fulfill his commitment to supporting the legal cannabis market?

Governor Newsom has until October 12 to act on AB 564, giving him several weeks to consider the measure’s implications. The clock is ticking, and the answer will shape California cannabis policy for years to come.

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