March 11, 2025
San Diego is targeting licensed cannabis businesses in hopes of squeezing out another $4 million in tax revenue from the industry to help close the city’s $258 million structural budget deficit. But that $4 million projection assumes that cannabis consumers don’t take their dollars elsewhere to avoid an overtaxed market.
San Diego City Council members voted, 8-1, on March 10 to increase the city sales tax on cannabis retailers from 8% to 10%—or a 25% increase—effective May 1, 2025. The city’s municipal code grants council members the authority to adjust the tax to a maximum rate of 15% of gross receipts. The tax rate began at 5% following voter approval of a cannabis program in 2016. The rate then increased to 8% on July 1, 2019.
This city tax rate is in addition to a 7.75% state sales-and-use tax and a 15% state excise tax on cannabis retailers, which, absent legislative action, will automatically increase to 19% on July 1, 2025.
This means San Diego’s effective tax rate of 30.75% on cannabis dispensaries would increase to 32.75% on May 1 and then again to 36.75% on July 1.
San Diego-based cannabis attorney Kelly Hayes was one of many public commenters who opposed the tax increase during Monday’s council meeting.
“There are no other products that are taxed like this,” Hayes said. “These businesses are struggling to operate in a legal market and increasing taxes will only cause the illicit market to thrive more. Your staff report shows that nearby jurisdictions have much lower tax rates and it also states that it’s likely and possible that less tax revenue will be collected. The tax increase is telling business owners you don’t want them operating here and telling customers you don’t want them purchasing cannabis here.”
City Treasurer Elizabeth Correia, whose office recommended the tax hike, reviewed how much tax revenue San Diego’s dispensaries have generated in past years, including $17 million remitted by 23 retailers in fiscal year 2023, $15.9 million remitted in fiscal 2024, and $7.4 million remitted by 25 retailers during the first seven months of fiscal 2025 (through Jan. 31).
As of early March, the California Department of Cannabis Control has 28 active dispensary licenses listed for San Diego, which has a citywide cap of 36 dispensary permits.
Correia compared her office’s recommendation to other California cities of similar size, such as Los Angeles and San Jose, which each tax cannabis businesses at 10%, according to a Feb. 24 report from the treasurer’s office. Los Angeles, San Diego and San Jose are the three most populated cities in California and are now among the highest-taxed cannabis jurisdictions in the state.
Meanwhile, San Francisco—the fourth largest city—taxes cannabis retailers 2.5% for gross receipts between $1 million and 1.5 million, and 5% for gross receipts over $1.5 million.
“Assuming taxable gross receipts remain consistent, the proposed tax rate increase would generate approximately $3.97 million in additional annual tax revenue,” Correia wrote in the report. “However, increasing the cannabis business tax rate may reduce gross receipts generated by retail locations within the city due to the illicit market and retail locations located outside of the city, thereby reducing tax revenue remitted to the city.”
The treasurer’s report also notes that cannabis business taxes are less in neighboring cities, including 4% in La Mesa, 5% in Lemon Grove, 7% in Chula Vista and 2% in unincorporated areas of San Diego County.
Shelby Huffaker, who chairs the San Diego chapter of Americans for Safe Access, urged city council members to reject the tax increase ahead of Monday’s meeting.
“This will create disparities in access to legal, regulated cannabis products, where only a minority of patients and consumers will have adequate and reliable access to products that are tested for safety and quality,” Huffaker wrote in a submitted comment. “It will also likely result in less affluent consumers turning to neighboring jurisdictions, which all have lower cannabis business tax rates than the city of San Diego, or to the unregulated market. Either of these alternatives will result in less revenue for the city, not more.”
Following public comments during Monday’s meeting, council President Joe LaCava acknowledged how much the state taxes cannabis and said he believed that the city’s bump from 8% to 10% “will not be felt by the average consumer.”
“It would not be a tipping point in their decision about whether to purchase through a legal retailer or not,” he said. “However, I do not remain insensitive to the pressure on local businesses going forward. I also recognize that we are not singling out this industry. The actions that this council and the mayor has taken so far is looking at across the board, making sure that we’re collecting the revenue, that it’s consistent with other jurisdictions.”
Although $4 million in extra cannabis tax revenue represents just 1.6% of the city’s structural budget deficit, San Diego Mayor Todd Gloria said during his State of the City address in January that his administration is focused on permanent fixes rather than relying on one-time measures given the unlikelihood of significant additional revenue in the coming years.
Editor’s note: San Diego’s current $5.82 billion budget for fiscal year 2025 represents a $643.2 million increase, or 12.4%, compared to the previous year. The new fiscal year starts July 1.
Gloria also said that navigating “one of the most challenging financial periods” for San Diego needs to be done without lifting the gas pedal on four priorities: keeping neighborhoods safe, reducing homelessness, building more housing and fixing roads.
“The task ahead ... is to right-size our city budget—not just for this year, but for the long-term,” Gloria said. “It means matching up our resources with our priorities and making hard choices, including reducing or eliminating some city services.”
On Feb. 18, the mayor announced a series of operational efficiencies, consolidations and spending reductions—including cutting 31 positions—that he hopes will save $5.3 million annually.
Cannabis represents the city’s effort to continue chipping away.
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