The San Diego City Council is scheduled Monday to consider raising a citywide tax on cannabis retailers from 8% to 10%.

A staff report from the Office of the City Treasurer says the move could provide a small amount of help in closing a $258 million deficit forecast for next fiscal year. But it also acknowledges the risk of losing revenue by driving more consumers to unlicensed sellers and lower-tax suburbs.

“Assuming taxable gross receipts remain consistent, the proposed tax rate increase would generate approximately $3.97 million in additional annual tax revenue,” the staff report reads. “However, increasing the cannabis business tax rate may reduce gross receipts generated by retail locations within the city due to the illicit market and retail locations located outside of the city, thereby reducing tax revenue remitted to the city.”

San Diego’s cannabis business tax was approved by voters in 2016 — the same year voters statewide approved legalizing the plant for recreational use. The city’s tax rate was initially set at 5%, then automatically increased to 8% in 2019. The City Council voted in 2022 to tax cannabis production facilities at 2%.

California also taxes cannabis sales at 15%. Including sales tax, the total markup on a cannabis purchase in San Diego is 31.75%, the staff report says.

Kimberly Simms, an attorney who represents cannabis businesses, said the city is right to be concerned about losing revenue when neighboring cities offer better prices and a wider variety of stores to choose from.

“Why would I pay a 10% tax when I could now go to my La Mesa dispensary, and they only impose a 4% tax?” Simms said. “We’re not being competitive with the cities around us, and I think it’s short-sighted.”

San Diego’s land use regulations for cannabis retail outlets were adopted in 2014. The city requires a greater separation from “sensitive uses,” such as schools and parks compared to state regulations, and it allows no more than four retail outlets per City Council district. Despite a citywide cap of 36 retail permits, the staff report says only 27 were operating in the city as of Feb. 1, 2025.

According to a statewide database of cannabis licenses, La Mesa has fewer cannabis retailers than San Diego — but more than 11 times as many retailers per capita compared to its more populous neighbor.

Simms said if San Diego wants to extract more revenue from the cannabis industry, it should consider allowing the industry to grow by offering more permits and allowing new types of cannabis businesses.

“We can look down to National City or up to West Hollywood and maybe really consider consumption lounges, which drive tourism, which drive longer patronage and higher sales and greater revenue,” Simms said.

Last year San Diego Mayor Todd Gloria abandoned efforts to establish a new “cannabis equity” program, which would have offered support for people who were criminalized under prohibition to enter the legal cannabis market.

Another effort from Councilmember Stephen Whitburn to expand permit opportunities failed to advance after his chief of staff was indicted — and later convicted — on charges related to his cannabis consulting business.

National City was the first in San Diego County to permit a cannabis consumption lounge, which allows both retail sales and onsite smoking, dining and hanging out. The business is scheduled to open next month.