San Diego Cannabis Taxes Hurting Dispensaries
- Zack Figg
- 5 days ago
- 4 min read
When Raising Cannabis Taxes Pushes
Consumers Back to the Black Market
San Diego’s attempt to increase cannabis tax revenue has produced an outcome that should give policymakers pause. According to recent reporting, the city raised tax rates on licensed cannabis dispensaries, yet total tax receipts from the sector declined rather than increased.
To the casual observer, this may seem counterintuitive. Higher tax rates should generate more revenue, right? In reality, cannabis markets do not behave like traditional consumer goods. When prices rise due to over-taxation, demand does not simply absorb the increase. Instead, consumers substitute away from licensed operators toward unlicensed alternatives.
For cities like San Diego, the lesson is clear: when cannabis taxes rise too high, the primary beneficiary is not public services, but the illicit market.
San Diego Cannabis Taxes Hurting Dispensaries
San Diego cannabis taxes hurting dispensaries is not a theoretical concern. It is now a documented reality. As tax rates increased, licensed dispensaries raised prices to cover higher operating costs, and consumers responded by shifting purchases to unlicensed alternatives.
San Diego raised its cannabis business tax with the expectation that higher rates would translate into higher municipal revenue, however, overall collections fell short. Licensed dispensaries faced higher operating costs, higher shelf prices, and increased pressure on margins.
Meanwhile, consumers quietly adjusted their behavior.
This is not a failure of the cannabis industry. It is a predictable outcome of basic economic principles colliding with a highly price-sensitive consumer base.
The Economics Policymakers Keep Ignoring
Cannabis consumers are highly price sensitive, especially in mature markets like California where access is widespread. When prices rise at licensed dispensaries, consumers do not simply consume less. They often consume elsewhere.
This is known as the substitution effect.
If a consumer can obtain a similar experience from:
an unlicensed delivery service,
a smoke shop selling non-compliant THC products,
or a traditional dealer offering cannabis alongside other substances,
then the licensed, compliant, tax-paying dispensary becomes the least competitive option when taxes push prices too high.
The key point for lawmakers is this:licensed dispensaries do not primarily compete with each other. They compete with the black market.
And the black market pays zero taxes, faces no testing requirements, and operates without regulatory overhead.
Why Over-Taxation Undermines Public Policy Goals
For licensed operators, higher municipal taxes compress margins in an already challenging environment. Rent, labor, security, compliance, and inventory costs do not decline when taxes rise. They compound.
This directly impacts:
profitability,
business valuations,
and the willingness of buyers to enter the market.
As we outlined in What Is a Dispensary Worth in California, valuation multiples are heavily influenced by after-tax cash flow, not gross revenue.
When cities raise cannabis taxes without accounting for substitution behavior, they effectively reduce the long-term value of licensed cannabis businesses operating within their borders.
Why This Matters for Cannabis Businesses for Sale in San Diego
San Diego remains one of the most desirable cannabis markets in California. Demand is strong, tourism is consistent, and consumer awareness is high. However, tax policy plays an outsized role in determining whether licensed businesses thrive or struggle.
For buyers evaluating a San Diego dispensary for sale, municipal tax rates are not a footnote. They are a core underwriting variable.
Higher effective tax burdens:
reduce EBITDA,
increase operational risk,
and lower exit multiples.
Conversely, rational tax structures that keep licensed prices competitive support:
higher transaction volumes,
stronger compliance,
and more stable valuations.
This is why cannabis tax policy is not just a political issue. It is a market structure issue.
Cannabis Taxes vs. Reality
San Diego’s experience mirrors broader trends across California. As we discussed in our breakdown of cannabis taxes tied to child care and other municipal programs, policymakers often overestimate how much tax the cannabis sector can absorb before consumer behavior shifts.https://www.pacgarden.com/post/cannabis-taxes-19-percent-child-care-businesses
Cannabis is not alcohol. It is not gasoline. It is not tobacco.
It exists in a competitive ecosystem where unregulated substitutes are readily available. Tax policy that ignores this reality produces exactly the outcome San Diego is now experiencing.
The Policy Choice in Front of Lawmakers
Lawmakers face a clear choice:
They can design cannabis tax regimes that:
keep licensed operators competitive,
incentivize consumer compliance,
and generate sustainable long-term revenue,
or they can continue raising taxes until licensed dispensaries become uncompetitive and the illicit market fills the gap.
If the goal is to encourage consumers to choose tested, regulated, tax-paying dispensaries, then price matters. A lot.
What This Means for Investors and Operators
For operators, San Diego’s experience reinforces the importance of:
location-specific tax analysis,
proactive advocacy at the municipal level,
and disciplined cost control.
For investors and buyers evaluating cannabis businesses for sale in California, tax sensitivity is no longer theoretical. It is operational.
Markets that balance regulation with competitive pricing will attract capital.
Markets that over-tax will continue to see declining licensed market share.
Conclusion: Taxes Don’t Exist in a Vacuum
San Diego’s declining cannabis tax revenue is not a mystery. It is a case study in economic behavior.
When licensed dispensaries become too expensive due to over-taxation, consumers substitute away. The black market does not disappear. It thrives.
If policymakers want consumers to make the “right” choice, they must make the compliant choice competitive. Otherwise, well-intentioned tax policy will continue to backfire.
At Pac Garden Assets, we believe sustainable cannabis markets are built on rational regulation, realistic taxation, and an honest understanding of consumer behavior.
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