The San Diego City Council Monday voted to increase the tax rate for cannabis businesses from 8% to 10% as the city faces a looming budget deficit.
The move will go into effect on May 1 and generate an estimated $3.97 million for the city if gross receipts remain the same. That is not a sure thing, however, as people buying products could shift their money elsewhere.
"It sounds like folks are going to stop buying here and turn to another source," Councilman Kent Lee said. "It is estimated to generate just shy of $4 million. It will likely be less than that."
Lee, along with seven of his colleagues, approved the tax hike. Councilman Henry Foster III was the sole no vote.
Members of the United Food and Commercial Workers Union spoke about the illicit market and declining sales already hurting the industry. Others who spoke suggested allowing on-site consumption at existing cannabis businesses.
San Diego's Independent Budget Analyst Charles Modica did note that the city's tax revenue from the industry had been declining since the pandemic, only offset by the addition of new businesses.
In 2016, voters in the city approved Measure N, which imposed a gross receipts tax of 5% on all non-medical cannabis businesses but also stipulated the tax cannot exceed 15%. This initial rate was later raised to the current 8%.
In 2022, an ordinance reduced the tax rate for cannabis production facilities to 2%. Monday's item would not change the rate for these businesses.
Excluding the cannabis production facilities, 27 cannabis businesses operate in the city. During the last fiscal year, they generated $15.87 million in special cannabis taxes.
Cannabis retail sales are assessed a 15% state excise tax, 7.75% sales tax, and the current local cannabis tax rate of 8%, resulting in a total markup of 31.75%.
Other large west coast cities such as Los Angeles and San Jose have a 10% cannabis business tax rate. San Francisco is between 2.5%-5%, depending on overall gross receipts. For local cities, Chula Vista, Encinitas and Vista all have rates of 7%, while Oceanside and Lemon Grove are at 5% and La Mesa at 4%. The only real outlier is San Diego County's unincorporated areas, which have a cannabis business tax rate of 2%.
Council President Joe LaCava said the council was not singling out the cannabis industry, rather bringing it consistent with other jurisdictions in the state.
