A San Diego report indicates that city officials overestimated revenue from a cannabis tax hike, projecting a $1.5 million shortfall, which analysts attribute to increased competition from the illegal market, oversupply driving down wholesale prices, and high tax rates (over 30% in some cities) driving customers to the illicit market.

San Diego Cannabis Revenue Lower Than Expected After Local Tax Hikes

Dec 31, 2025

Graham Abbott

Ganjapreneur

The San Diego Office of the Independent Budget Analyst (IPA) released a
report showing that city officials likely overestimated the revenue
potential of a cannabis business tax hike they implemented earlier this
year.

The report highlights diminished cannabis tax revenues as one of the
largest negative variances in the city budget, projecting $19.7 million in
cannabis business tax revenue — $1.5 million short of the city’s
anticipated $21.3 million.

The authors suggested that “increased competition from the illegal market
and decreased wholesale prices caused by an oversupply of cannabis
products” caused the shortfall.

“As the cost of living continues to rise all around us, people have to make
choices. And if there’s readily available cannabis on the illicit market,
and you continue to make it more and more expensive on the regulated
market, people are going to be driven back to the illicit market.” —
Kimberly Simms, cannabis attorney, via KPBS

California implements a blanket 15% excise tax on the cannabis industry in
addition to the state’s 7.5% sales tax, but municipalities can stack local
taxes in addition. Operators in cities like Los Angeles, San Jose, and San
Diego are faced with tax rates well over 30%, some of the highest in the
country.