Cotati City Council
Agenda Staff Report
Item type: CONSENT CALENDAR (ACTION)
To: City Council
Subject: RESOLUTION OF SUPPORT FOR ASSEMBLY BILL 564 TO
HALT THE STATE EXCISE TAX INCREASE ON CANNABIS
Date: May 13, 2025
Written by: Damien O'Bid, City Manager
Recommendation
It is recommended the City Council adopt a resolution supporting State Assembly Bill 564, which would halt the scheduled increase in the State excise tax on cannabis.
Background
Due to prior legislative actions (AB 195), the State removed the tax on cannabis cultivation with a change in statute that was to shift the lost revenue to an increased excise tax on retailers, not to exceed 19%. That cultivation tax accounted for more than $166 million in state revenue in 2021, according to the California Department of Taxation and Fee Administration (CDTFA).
Increasing the cannabis excise tax at retail an additional four percentage points would generate roughly that same amount under current market conditions.
The current State excise tax on retailers is 15%. To make up the lost revenue from cultivation, the retailer excise tax is scheduled to increase to 19% on July 1, 2025.
Analysis/Discussion
The cannabis industry, as has been widely reported, expanded rapidly upon legalization and then began to rapidly contract with closures and bankruptcies due to a combination of speculative investments that were unsound, high taxes, high operating costs due to banking and other tax restrictions due to cannabis being illegal federally and finally competition from the black market that can undercut the legal market on cost. While there are many contributing factors, AB 564 attempts to tackle one of these elements - stabilize the state excise tax at the current rate.
Attached is an overview of the state of the cannabis market, outlining the history as well as the relative taxation of cannabis. The article also references the groups that petitioned the state to reverse the changes under AB 195 and begin taxing cultivation again.
Cal Cities has a ”watch” position on AB 564.
Financial Considerations
If the state excise tax increases from 15% to 19%, it will likely result in some reduction in sales at our two cannabis dispensaries. While Cotati has among the lowest local taxes in the State, this, in turn, could reduce general fund revenue collected by the 3% cannabis business tax, as well as the 1% Bradley Burns sales tax and 1% Measure S use tax.
Environmental Issues
Where it can be determined with certainty that there is no possibility that the activity in question may have a significant effect on the environment, the activity is not subject to CEQA review.
This general rule can be applied to activities which could be subject to the CEQA process, but which logic dictates should not be subject to CEQA review. Therefore, based on the information provided above, the proposed resolution is exempt from CEQA pursuant to Section 14.03.021 of the CEQA Guidelines in that there is no possibility that the activity may have a significant impact on the environment.