Cannabis Taxes at 19 Percent: Funding Child Care While Straining Businesses

California cannabis businesses face one of the heaviest tax burdens in the nation. With excise taxes funding child care, law enforcement, and environmental cleanup, dispensaries are left struggling under the weight. The question: can the industry sustain growth while carrying so much on its back?

Cannabis Taxes in California: Balancing Child Care Funding and Industry Survival

Are Cannabis Taxes Sustainable?

California’s cannabis industry is facing a tipping point. On July 1st, the state’s cannabis excise tax rose from 15 percent to 19 percent, increasing the pressure on an already fragile legal market. For many operators, this is more than just a tax hike, many are calling it an existential threat.

Cannabis taxes in California were designed to fund important state programs like child care, public safety, and environmental cleanup. However, the LA Times and Assembly Majority Leader Cecilia Aguiar-Curry have highlighted that this arrangement raises a critical question: how sustainable is it to pin the future of social programs on the shoulders of one struggling industry?

"Revenues from legal sales of cannabis are already dropping and if we keep raising the tax they’ll drop even more. That penalizes cannabis businesses who are doing the right thing and working within the legal market. And, it makes illegal sales from cartels and criminals more competitive. We need to fund our kids’ education through the State General Fund, but if we want to supplement education and youth programs, cannabis tax dollars will only exist if we steady the legal market and go after those illegal operators."

High cannabis taxes not only endanger the businesses trying to comply with state law, but also inadvertently fuel the illicit market, where unlicensed sellers pay no taxes and can undercut legal dispensaries. The result is a shrinking tax base and a looming crisis for both the industry and the programs that rely on it.

The Weight of Social Responsibility on Cannabis

California cannabis excise taxes are shouldering immense responsibility. Revenue is earmarked for programs including:

• Child care and early childhood education

• Law enforcement and California Highway Patrol

• Environmental restoration projects

• Community reinvestment and research at public universities

Child care alone receives more than $80 million annually from cannabis taxes, supporting thousands of subsidized slots for families in need. Parent advocacy groups argue that reducing cannabis taxes would harm children, unfairly framing the debate as “choosing businesses over kids.”

This binary thinking sidesteps the reality: if the legal cannabis industry collapses under heavy taxation, those child care funds dry up anyway.Instead of pinning essential services on a shrinking tax base, California needs to rethink how it funds programs sustainably. After all, no one suggests child care or environmental cleanup should be financed through tobacco taxes alone; why should cannabis be different?

The Shrinking Legal Market

Even before the tax increase, the California Department of Cannabis Control estimated that only 40 percent of cannabis consumed in the state came from the legal market. The rest flowed through unlicensed operators who pay no taxes, ignore safety rules, and sell untested products.

With excise taxes now at 19 percent — plus local sales taxes that push the total rate near 40 percent in many local markets — licensed dispensaries simply cannot compete effectively. In Los Angeles, the price difference between legal and illicit cannabis can approach 47 percent. Consumers are voting with their wallets, and more are turning back to the illicit market.

This trend not only undercuts legitimate operators but also undermines public safety and deprives the state of the revenue it once hoped to collect. It’s a policy-driven disadvantage that could hollow out the legal market created under Proposition 64. This is the uninteded consequence of over-taxation.

For context on how illicit operators continue to threaten legal businesses, see our recent blog: California Cannabis Industry Faces Illicit Market Threats.

The Pitfalls of Sin Taxes

Cannabis taxes highlight the risks of relying on “sin taxes.” With tobacco, the tax base shrank as smoking rates declined. With cannabis, high tax rates push buyers into the illicit market, eroding the tax base while increasing risks to public health.

Experts like Lucy Dadayan of the Tax Policy Center warn that these taxes are volatile and unsustainable for funding long-term programs like child care and education. While they may raise significant revenue initially, they eventually create mismatches between obligations and revenue, leaving programs exposed when the cannabis consumption patterns that funded the programs shift from the taxed legal market to the untaxed, unregulated market.

If California is serious about sustaining its social programs, it must broaden funding sources instead of tying them so heavily to cannabis sales.

Funding Programs Without Overburdening Cannabis

The cannabis industry is not opposed to contributing to public programs. What it opposes is carrying a disproportionate burden that ultimately harms everyone. California already diverts cannabis tax revenue to a wide range of causes, including:

• Child care and early childhood education (81M annually)

• Community reinvestment grants (50M annually)

• Environmental restoration through Fish and Wildlife

• Public safety and California Highway Patrol (3M annually)

• Research at public universities through 2029

These are obviously important programs, but tying their future to a single, volatile revenue stream is shortsighted. Instead, California should explore funding through the State General Fund, while allowing cannabis excise taxes to remain at sustainable levels. This approach would stabilize programs and ensure the cannabis industry survives in order to continue contributing tax dollars.

Industry Implications and Potential Solutions

For cannabis businesses, the stakes are existential. If the state continues to overtax, many operators will face insolvency, consolidating the market further and empowering bad actors in the illicit space. For policymakers, the choice is clear: either create a sustainable tax structure that preserves the legal market or risk losing both the industry and the revenue it generates.

Solutions could include:

• Reducing excise taxes to sustainable levels (for example, rolling back to 15 percent).

• Diversifying funding sources for child care and environmental programs.

• Consider a tax holiday whereby the State allows ALL operators to catch up on backtaxes that are owed so they can remain in good standing.

• Improving enforcement against unlicensed operators to protect the tax base.

Supporting businesses through consulting and strategic positioning, such as opportunities highlighted by Pac Garden Assets and properties like King City Processing and Distribution Cannabis Real Estate, Monterey County Manufacturing Facility, and Orange County Cannabis Retail and Real Estate.

For more context, see our related analysis on Trump hints at cannabis rescheduling and The Great California Cannabis Reset.

Conclusion: Right Sizing Cannabis Taxes

California must confront the reality: raising taxes on cannabis is not a long term solution. Proposition 64 may have been imperfect, but after nearly a decade, one lesson is clear: the illicit market grows as taxes rise. By easing the burden on legal operators and funding social programs sustainably, California can preserve the industry, protect consumers, and ensure that child care and other vital services do not collapse under the weight of flawed tax policy.

We remain committed to advocating for balanced, sustainable cannabis taxes. A thriving legal market is the only way to generate lasting revenue, create jobs, and build a future where cannabis supports communities without being crushed by unfair burdens. Stop overtaxation.

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FAQ Section

FAQ: Cannabis Taxes in California

Q1: What are cannabis excise taxes in California right now?

As of July 1, 2025, California’s cannabis excise tax increased from 15 percent to 19 percent. When combined with state and local sales taxes, total tax rates on legal cannabis purchases can approach 40 percent in some jurisdictions.

Q2: Where do California cannabis taxes go?

Cannabis taxes fund a wide range of state programs, including child care and early childhood education (about $81 million annually), community reinvestment grants ($50 million annually), environmental restoration through Fish and Wildlife, public safety programs like the California Highway Patrol ($3 million annually), and research at public universities through 2029.

Q3: Why are high cannabis taxes a problem for the legal market?

High cannabis taxes make legal products far more expensive than illicit ones, sometimes by nearly 47 percent. This pushes consumers back into the illicit market, reducing legal sales, shrinking the tax base, and undermining the very programs cannabis taxes were designed to support.

Q4: What solutions are being proposed to make cannabis taxes more sustainable?

Proposals include rolling back excise taxes to 15 percent, diversifying funding sources for child care and environmental programs through the General Fund, offering a temporary tax holiday to help licensed operators catch up on back taxes, and strengthening enforcement against unlicensed operators.

Q5: Is it possible to balance child care funding and cannabis industry survival?

Yes, but it requires shifting away from over-reliance on cannabis excise taxes. Essential programs like child care should be supported through stable funding sources, while cannabis taxes should be set at levels that allow the legal market to grow and compete or eradicate the illicit market. A thriving industry will generate more reliable long-term revenue than one pushed toward insolvency.