San Diego’s Cannabis Tax Increase: Implications and Reactions

As San Diego grapples with a substantial $258 million structural budget deficit, attention has turned to the licensed cannabis industry, aiming to secure an additional $4 million through a tax increase. Approved by the city council on March 10, 2023, this adjustment raises the sales tax on cannabis retailers from 8% to 10%, effective May 1, 2025. However, the move is contentious, with concerns about potential consumer backlash against higher taxes in the cannabis market.

The Tax Landscape in San Diego

Historically, the cannabis sales tax in San Diego has seen a significant rise since the program’s initiation. Beginning at 5% following voter approval in 2016, the tax increased to 8% in July 2019. The recently approved increase marks a 25% hike and allows room for further adjustments up to 15% as per the municipal code. Beyond San Diego’s local taxes, cannabis retailers are already subject to a 7.75% state sales-and-use tax along with a 15% state excise tax, which is set to rise to 19% by July 1, 2025.

Effective Tax Rates Post-Increase

With the new local tax, San Diego’s effective tax rate on cannabis dispensaries would rise from the current total of 30.75% to a staggering 32.75% starting May 1, increasing again to 36.75% later that July. This sets the stage for San Diego to become one of the highest-taxed areas for cannabis sales in California, alongside Los Angeles and San Jose, both of which also impose a 10% tax rate.

Industry Concerns About the Tax Hike

Cannabis attorney Kelly Hayes voiced significant opposition to the tax hike, highlighting that no other products are taxed similarly. Hayes argues that higher taxes could inadvertently bolster the illicit market, as consumers may choose to patronize businesses in neighboring jurisdictions with lower tax rates, or revert to unregulated sources to avoid the hike. Local dispensaries have already seen substantial revenue generation, remitting over $17 million in fiscal year 2023 and $15.9 million projected for 2024.

Comparison with Neighboring Jurisdictions

San Diego’s cannabis tax rate contrasts sharply with those of neighboring cities. For instance, La Mesa imposes just 4%, Lemon Grove 5%, and Chula Vista 7%. This disparity raises questions about the sustainability of San Diego’s approach in light of local competition for cannabis consumers. Shelby Huffaker from Americans for Safe Access has cautioned that the tax increase could lead to inequities in access for consumers seeking regulated products.

City Officials and Public Response

During the council meeting, City Treasurer Elizabeth Correia emphasized that while the increase might generate revenue, it could ultimately decrease gross receipts as consumers seek alternatives. The prevalent concern remains that incrementally raising taxes on cannabis will diminish the city’s ability to collect the revenue it seeks.

City Council President Joe LaCava acknowledged the burden of existing state taxes on consumers, suggesting that the new tax would not serve as a significant deterrent for legal purchase. He underscored the importance of aligning the city’s tax strategy with those of other jurisdictions while considering the pressures faced by local businesses.

Future Financial Outlook

As San Diego’s financial challenges loom large, Mayor Todd Gloria has reiterated the need for permanent solutions over temporary fixes to the budget crisis. With cannabis taxes making up a small fraction of the city’s budget deficit, city leadership continues to explore operational efficiencies. The mayor recently outlined plans to save $5.3 million annually by reducing positions and consolidating services, aiming to navigate through what he described as one of the most challenging financial periods for the city.

In this complex financial landscape, cannabis remains a focal point for generating much-needed revenue, despite the inherent challenges posed by taxation levels that may push consumers away from legal establishments.

Conclusion

As the city braces for the new tax regime on cannabis retailers, both proponents and opponents of the tax increase continue to voice their opinions. The implications of the hike could shape not only the cannabis market in San Diego but the broader financial landscape of the city as it struggles to meet essential budgeting needs.