San Diego, December 30, 2025
San Diego’s cannabis tax revenue has not met expectations following a rise in the business tax rate from 8% to 10%. City officials are reassessing their financial strategies as revenues fall short of the $21.3 million projection by $1.5 million. Factors such as competition from the illegal market and reduced wholesale prices due to oversupply are contributing to this shortfall. The city is implementing new measures to support licensed retailers, including extended operating hours for dispensaries and launching a new consumption venue.
San Diego’s Cannabis Tax Revenue Falls Short
A Shift in Revenue Expectations
San Diego, California – The recent increase in the cannabis business tax from 8% to 10% has not yielded the anticipated revenue, causing city officials to reevaluate their financial expectations. The rise in tax was implemented in May 2025 as a response to a pressing $258 million budget deficit. However, recent receipts from the cannabis sector have only generated about $19.7 million in revenue for the fiscal year—the city falls short of its $21.3 million projection by $1.5 million.
Understanding the Revenue Shortfall
The Office of the Independent Budget Analyst (IBA) identified several key factors leading to the disappointing revenue figures. Increased competition from the illegal cannabis market and a significant drop in wholesale prices due to oversupply are substantially impacting the taxable gross receipts reported by legal operators.
Market Dynamics and Consumer Choices
Price sensitivity among consumers is a significant factor in their purchasing decisions. With cheaper, unlicensed products readily available, many residents are drawn back to the illicit market. Moreover, neighboring jurisdictions like Encinitas and La Mesa, which boast lower tax rates, provide consumers with more attractive alternatives. This competition has put further strain on San Diego’s licensed cannabis businesses as they strive to capture consumer interest.
City Initiatives to Boost Compliance and Activity
In an effort to support locally licensed cannabis retailers, San Diego extended the operating hours for dispensaries, allowing them to operate from 6 a.m. to 10 p.m. This change took effect in August 2025. Moreover, the opening of San Diego’s first marijuana consumption venue, Sessions by the Bay, located in National City, aims to provide a unique experience that may draw customers back into the regulated market.
Despite these initiatives, the city acknowledges the existing challenges in balancing tax structures against competitive market forces and consumer preferences. Therefore, ongoing assessment and potential adjustments may be essential to meet future revenue objectives.
A Historical Perspective on Cannabis Taxation
San Diego’s approach to cannabis taxation has developed significantly since its inception. The tax was initially approved by voters at a rate of 5% in 2016, increased to 8% in 2019, and raised again to 10% in 2025. These changes have been strategically designed to bolster city revenue while addressing various budgetary requirements.
Statewide Considerations
The challenges in San Diego mirror those faced across California, where the cannabis tax revenue has experienced its own setbacks. In 2024, the state’s excise tax revenue saw a substantial decline of 22% compared to the prior fiscal year. Additionally, by 2025, overall cannabis sales statewide appeared to plateau, although some inland counties have registered growth in this sector. These trends illustrate the complexities inherent in the cannabis marketplace and how taxation influences consumer habits.
Conclusion
San Diego’s ongoing reevaluation of its cannabis business tax underscores the delicate balance between taxation levels and market dynamics. As the city continues to explore new strategies to enhance revenue while fostering a thriving legal cannabis industry, community engagement and support for local businesses remain crucial for economic resilience and growth.
FAQ
What is the current cannabis business tax rate in San Diego?
The cannabis business tax rate in San Diego is currently 10%, increased from 8% in May 2025.
Why did San Diego raise the cannabis business tax rate?
The tax rate was increased to address a $258 million budget deficit.
What factors contributed to the revenue shortfall?
The shortfall is attributed to increased competition from the illegal market and decreased wholesale prices due to an oversupply of cannabis products.
How is San Diego responding to the revenue shortfall?
San Diego has extended operating hours for dispensaries and opened its first marijuana consumption venue to support licensed retailers.
What is the history of cannabis business tax rates in San Diego?
The tax rate has evolved from 5% in 2016 to 8% in 2019, and currently stands at 10% as of May 2025.
Key Features
| Feature | Details |
|---|---|
| Current Tax Rate | 10% (increased from 8% in May 2025) |
| Revenue Shortfall | $1.5 million below projected $21.3 million for the fiscal year |
| Contributing Factors | Competition from the illegal market, decreased wholesale prices due to oversupply |
| City’s Response | Extended dispensary operating hours, opened first marijuana consumption venue |
| Tax Rate History | 5% in 2016, 8% in 2019, 10% as of May 2025 |
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