City officials in San Diego are anticipating a steep drop in tax revenue from cannabis sales this year, as California’s regulated marijuana market continues to face difficult headwinds. 

The San Diego Union-Tribune reported on Tuesday that “San Diego officials say they now expect cannabis tax revenue to be 23 percent lower than they had previously expected during the ongoing fiscal year that ends June 30 — $19.8 million versus $25.7 million,” citing industry leaders who say that “the primary cause of their ‘double-digit’ drops in sales is illegal delivery services, which they estimate make up about half of the region’s cannabis market.”

“The legal industry is facing huge competition from the non-legal industry,” said Phil Rath, executive director of United Medical Marijuana Coalition, a trade group representing a number of marijuana dispensaries, as quoted by the San Diego Union-Tribune. “Delivery services are an ongoing enforcement challenge for the city.”

The plunging revenues in San Diego are symptomatic of a statewide problem in California, where the nearly seven-year-old legal cannabis market has gone bust.

In November, Politico reported that tax revenue from the state’s licensed and regulated marijuana market “plummeted to below $130 million during the third quarter, a nearly $100 million drop from the same period last year.” 

“Legal recreational and medical pot sales in California have consistently shrunk since peaking at over $1.5 billion in the second quarter of 2021, as licensed retailers continue to lag behind an expansive underground market that’s estimated to be worth up to $8 billion,” Politico reported at the time. “California residents purchased $1.27 billion worth of licensed cannabis products in July, August and September, creating $128 million in excise taxes, according to the California Department of Tax and Fee Administration. That represents an $18 million drop from the previous quarter, and a $52 million decline from all-time highs.”

In a separate story that month, Politico reported that “California’s black market undermined its own legal industry,” noting that six years after the vote to legalize recreational pot in the state, “illegal sales have far outpaced the regulated market, and many operators have closed up shop.”

“High taxes, local government opposition and competition from the underground market have stifled the success of the legal cannabis industry in the nation’s most populous state,” Politico added.

Lawmakers and other officials throughout the state have pursued solutions to bolster the legal weed market.

Earlier this month, a Democratic assemblyman in California introduced a bill that would enable the state’s licensed cannabis consumption lounges to serve food and drink, which he says could be a boon for the embattled industry.

“California’s small cannabis businesses are struggling,” said Matt Haney, the lawmaker sponsoring the bill. “Issues like over-saturation, high taxes, and the thriving black market are hurting cannabis businesses who follow the rules and pay taxes.”

In San Diego, city officials “have also lowered their long-term projections for cannabis tax revenue, which has been expected to pay for enforcement of dispensaries and a new cannabis equity program that aims to give a leg up in the industry to people of color adversely affected by the war on drugs,” according to the Union-Tribune.

“Just over a year ago, long-term estimates for cannabis tax revenue were projected at $31.5 million in fiscal year 2025, $33.3 million in fiscal 2026 and $33.8 million in fiscal 2027,” the newspaper reported. “In November, those were revised down to $26 million in fiscal 2025, $28.4 million in fiscal 2026 and $28.9 million in fiscal 2027. But city finance officials say they aren’t confident even in those revised estimates.”

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