San Diego is raising its city cannabis tax from 8% to 10% — a figure equal to the highest rate in California and significantly higher than the rates of all other local cities.

Critics said the increase, which the City Council approved Monday, will have the effect of boosting the illegal cannabis delivery market by pushing the total tax paid by legal dispensaries on each sale to more than 35% on July 1.

Council members said the tax hike makes them more willing to consider longtime requests from the local cannabis industry for longer hours, on-site consumption lounges and a crackdown on illegal delivery-based operations.

The goal of the increase is to help close a roughly $250 million budget deficit the city faces. But critics stressed that the higher cannabis tax would generate just $4 million annually — and that’s only if it doesn’t depress sales.

Council members were divided Monday on what impact the higher tax rate, which takes effect May 1, would have on cannabis sales at the city’s 25 dispensaries.

“This 2% bump will not be felt by the average consumer,” Councilmember Joe LaCava said. “It will not be a tipping point in their decision about whether to purchase through an illegal retailer or not.”

Councilmember Raul Campillo was more concerned.

“I have some hesitation about the fact that so many of our neighboring cities have significantly lower levels,” he said. “I think the consumer is particularly sensitive to this adjustment.”

Campillo noted that many San Diego neighborhoods are near other cities with lower rates, citing the proximity of the San Carlos neighborhood to La Mesa, which has a 4% city cannabis tax rate.

Other local rates include Chula Vista, Vista and Encinitas at 7%, Oceanside and Lemon Grove at 5% and the county government at 2% for dispensaries in unincorporated areas.

Statewide, San Diego’s increase puts at it the very top in California for city cannabis tax rates along with Los Angeles and San Jose, which are also both at 10%.

Critics of the increase stressed that city cannabis taxes are only part of the equation. Consumers also must pay sales tax, which is 7.75% in San Diego, and a state cannabis tax, which will rise from 15% to 19% on July 1.

Dispensary customers in San Diego are now paying just over 30% in total taxes on their cannabis purchases, and that will jump to more than 35% on July 1.

LaCava noted that dispensary customers with a medical cannabis card will continue to be exempt from paying the city’s cannabis tax. They are also exempt from paying sales tax.

He also stressed that the city is not singling out cannabis businesses in its effort to balance the budget. The city doubled parking meter rates in January and significantly raised hundred of city fees last week.

Campillo said he wants frequent updates about how the higher tax rate is affecting cannabis sales and city revenue from the tax.

Seeking to appease frustrated local dispensary owners, council members asked Mayor Todd Gloria’s staff to consider an industry wish list that dispensary owners reintroduced during Monday’s hearing.

The list includes expanding daily operating hours. City dispensaries are now allowed to be open from 7 a.m. to 9 p.m. Dispensaries would like that expanded to 6 a.m. to 10 p.m., the maximum allowed under state law.

Other items on the list include allowing on-site consumption lounges, which National City already allows, and banning intoxicating hemp, which is sold at some local smoke shops.

And finally, industry officials want San Diego to crack down on delivery companies that sell cannabis within San Diego but don’t pay any taxes and flout other state and local rules.

Phil Rath, who represents a coalition of local dispensary owners, predicted the proposals would collectively generate more money than the $4 million projected from the increase in the city’s cannabis tax rate.

“We recognize the monumental task you have of solving a very large budget problem,” he said. “We view the city as our partner, not as our enemy, and we are here to provide constructive suggestions to help mitigate the damage to our businesses.”

On the illegal delivery crackdown and potentially extracting city taxes from those businesses, Rath suggested the city try a new strategy.

“Recognizing you don’t have any money (for a city crackdown), our suggestion would be that you hire an outside law firm on a contingency basis and allow them to keep some slice of that newly found money,” he said.

Councilmember Vivian Moreno urged Mayor Todd Gloria’s staff to work quickly on the industry proposals.

“I do feel that those are all reasonable things to look at,” she said.

Matt Yagyagan, the mayor’s policy director, said some of the proposals require deep analysis and direction from the council.

“We’re open to bringing some of these items forward,” Yagyagan told the council. “I think we’re going to need to have a larger policy discussion with council as to how exactly these different things look.”

Moreno said she will be frustrated by delays but understands them.

“I do agree there does need to be a robust conversation on these particular changes,” she said.

Allowing on-site consumption lounges is the most controversial of the proposals. Existing dispensary rules prohibit on-site consumption, forcing buyers to buy cannabis at a dispensary and then take it elsewhere to consume.

The increase in the city’s cannabis tax rate comes as revenue from the tax has been slumping in recent years, largely due to more competition from dispensaries that have opened in other local cities.

City revenue from cannabis taxes dropped from $18.3 million in fiscal year 2023 down to $16.8 million during the fiscal year that ended last June. In the ongoing fiscal year, cannabis tax revenue is on pace for about $13.6 million.

City officials said, based on current trends, that the higher tax rate is expected to generate $3.97 million during fiscal 2026, which begins July 1.

Because the increase takes effect May 1, it is expected to boost cannabis tax revenue during the ongoing fiscal year by about $650,000.

Critics called the increase a mistake.

“It’s retail suicide for San Diego dispensaries,” said Russ Havens, editor of San Diego Cannabis Times.

The San Diego Regional Chamber of Commerce said city officials, despite their budget crisis, should empathize with cannabis businesses because of all the adversity they continue to face.

Others, including groups that stand to lose funding in the city’s new budget, praised the increase.

“If parking meters are doubling in cost, then recreational cannabis can surely withstand a 2-percentage point increase,” said Parke Troutman of the nonprofit Mid-City Community Advocacy Network.

San Diego’s cannabis tax is a gross receipts tax, so it is applied to all revenue generated, including the state tax.

City voters approved the tax in November 2016, the same election when state voters approved the use of recreational cannabis.

It was initially approved as a 5% tax, but it was raised to 8% in July 2019. The voters gave the City Council discretion to increase the tax as high as 15% without another public vote.