Under the recommendation, a first positive test for drug use would cost inmates 90 days' pay from work assignments, and repeat offenses could mean up to a year of lost wages.
However, inmates are paid only pennies an hour, prompting an official with the guards' union to question the proposed regulations on Monday.
The department also plans to standardize mandatory drug testing across prisons.
While making its proposal, the California Department of Corrections and Rehabilitation said there were more than 4,000 drug-related prison incidents last year. More stringent penalties for drug use would increase prison safety and help inmates complete substance abuse treatment programs, the agency said.
"We recognize a problem with the use of drugs in our population, and the culture that it creates, and we must act to prevent the introduction of narcotics while providing treatment to those who are addicted," department spokeswoman Kristina Khokhobashvili said in an email.
Nearly 23 percent of inmates tested positive for one or more illegal drugs during the screening in June of a quarter of the inmate population, the department said. The figure could be even higher since about 30 percent of the selected inmates refused to be tested, even though they were promised that no one would be punished for testing positive.
More than half the positive tests involved marijuana, 20 percent indicated morphine use; 14 percent methamphetamines; 11 percent amphetamines; and 2 percent cocaine.
Separate statistics show 320 prison visitors and 10 employees were arrested last year while trying to smuggle in drugs. Another 52 people were arrested for trying to bring drugs on to prison grounds when they had no reason to be there.
Illegal drugs in prison reinforces the strength of prison gangs, leads to inmate-on-inmate violence due to drug dependency, and increases the possibility of inmate-on-staff attacks because drugs can reduce inhibitions, the department said in urging the rule change.
The proposed regulations are set for a public hearing May 27 in Sacramento. Final approval would come from the corrections department itself after it considers public comment.
The rules would require that about 2.3 percent of inmates — or nearly 2,800 of the 121,000 inmates in state-run prisons and fire camps — be randomly selected for periodic urinalysis tests about once a week.
The California Correctional Peace Officers Association supports the drug screening, said Chuck Alexander, the union's vice president. But he doubted that losing pennies an hour would make much of a difference for inmates.
Depending on their work assignment, inmates are paid just 8 cents to 32 cents an hour, though a few making license plates at Folsom State Prison are paid 95 cents an hour.
Smugglers have punted balls filled with drugs over prison fences and sent in drugs in counterfeit legal mail or packages, among other efforts, Alexander said.
"The inmates know who it belongs to and if they steal it or don't get it to who it belongs to, they end up getting disciplined, if you know what I mean," he said.
Once inside, drugs can sell for three- to five times what they would bring on the street, he said.