California’s legal cannabis market is experiencing significant headwinds across Southern California. From the Central Coast to Los Angeles and down to San Diego, licensed operators face mounting challenges marked by declining tax revenues, business closures, and persistent competition from unlicensed operations. Compounding these challenges, a series of corruption scandals involving local officials has raised questions about the integrity of permitting systems designed to regulate the industry.
Declining Revenue and Business Closures
The financial trajectory of Southern California’s cannabis sector reflects broader challenges. In Santa Barbara County, cannabis tax revenue continues its downward trend, attributed in part to the county’s reliance on self-reporting and the cumulative impact of fees, taxes, and security requirements that have contributed to business closures.
Similar patterns exist throughout the region. In San Diego, cannabis sales have declined nearly 50% since fiscal year 2021, yet the city increased the cannabis tax rate from 8% to 10%. Statewide, California now has 10,828 inactive or surrendered cannabis licenses compared to 8,514 active ones—the first time inactive licenses have exceeded active permits. Cannabis sales dropped from $1.5 billion in Q2 2021 to $1 billion in Q2 2024, representing a 33% decline.
Los Angeles: Tax Delinquency and Market Contraction
The City of Los Angeles presents a particularly complex case study. The city faces $400 million in unpaid cannabis taxes, with more than two-thirds of LA’s 738 licensed cannabis companies failing to meet tax obligations. LA Treasurer Diana Mangioglu noted in an October 2025 letter that legally permitted businesses face challenges “due to widespread non-compliance with tax and permit regulations feeding a thriving black market, combined with a tax burden which vastly exceeds the rates paid by other industries.”
The city has proposed a tax amnesty program that would waive penalties in exchange for payment plans, estimating it would recoup only $30 million of the $400 million owed. Cannabis sales in Los Angeles have dropped 20% year-over-year and are down 41% compared to Q4 2021.
Local Permitting Decisions
Local government approaches to cannabis regulation vary considerably across Southern California. In San Luis Obispo County, the Atascadero City Council voted 3-2 against allowing retail cannabis stores in October 2025, despite staff estimates showing potential annual tax revenue of $500,000 to $1 million. The city’s staff report acknowledged that “the retail cannabis industry is in a state of flux, marked by financial struggles for legal businesses, intense competition from a thriving illicit market, and shifting tax policies.”
In Riverside, the City Council voted in March 2025 to cut the maximum number of cannabis permits from 14 to seven, limiting dispensaries to one per ward. The decision followed a 90-day pause on the cannabis permitting process that began in January 2025 when five of the 14 originally approved locations clustered in Ward 5. Deputy Police Chief Frank Assuma told the council that “the State of California’s regulatory and quality controls are inadequate” and that “there is no clear delineation between legal and illegal cannabis retail stores.”
According to the Department of Cannabis Control, 57% of California cities and counties do not allow retail cannabis businesses as of February 2025. California has approximately one legal retailer per 29,282 residents, compared to one per 6,145 residents in Oregon.
Public Corruption Cases
A California State Auditor report, published in March of last year, examined cannabis permitting at California local jurisdictions and identified several areas where local processes could be strengthened. The auditor noted at the time that “inconsistently following a local jurisdiction’s policy can erode public trust in that local jurisdiction’s permitting processes.” The report also observed that jurisdictions limiting permit numbers “potentially increase the value of those permits because of scarcity, leading to greater incentives for corruption committed by government officials.”
Baldwin Park Litigation
These concerns materialized in Baldwin Park, where a jury in September 2025 awarded cannabis company owner David Ju $1.9 million in damages against the city and several officials after finding they had committed fraud during the cannabis licensing process. The jury determined that former City Attorney Robert Tafoya, Councilmember Manuel Lozano, and former Councilmember Ricardo Pacheco were personally liable for $1.6 million.
The case stemmed from a scheme operating from 2017 to 2020. Former Councilmember Ricardo Pacheco admitted in 2020 to accepting bribes to facilitate cannabis licenses. Former Commerce City Manager Edgar Cisneros and former Baldwin Park City Attorney Robert Tafoya both pleaded guilty in late 2023 to federal bribery charges. Cisneros provided $45,000 in bribes to Pacheco to secure a permit, with the promise of receiving $235,000 once the permit was acquired. A 2022 Los Angeles Times investigation documented allegations that bribes as high as $250,000 were being paid to city officials to obtain permits.
Adelanto Case
Similar issues emerged in Adelanto, where former Mayor Richard Kerr was sentenced to 14 months in federal prison in August 2023 for accepting more than $57,000 in bribes and kickbacks in exchange for approving ordinances and securing permits for cannabis businesses. According to his plea agreement, illicit payments were disguised as charitable donations or campaign contributions.
Kerr’s successor, Mayor Pro Tem Jermaine Wright, was convicted in June 2022 of taking a $10,000 bribe from an FBI agent posing as a cannabis business owner and was sentenced to five years in prison. Edwin Snell, a community activist who applied for a dispensary license, told the Los Angeles Times that Kerr promised him and his partner they would be allowed to open a dispensary but instead “sold it to the highest bidder.”
Tax Structure and Unlicensed Market Activity
California’s cannabis tax structure has been a subject of ongoing debate. In Los Angeles, the overall tax rate for cannabis exceeds 40%, including a 10% local tax. The state excise tax increased from 15% to 19% in July 2025, though Governor Gavin Newsom subsequently signed legislation in September 2025 rolling back this increase and keeping the rate at 15% through 2028. In signing that legislation, the Governor acknowledged that “California’s cannabis economy can bring enormous benefits to our state, but only if our legal industry is given a fair chance to compete against the untaxed and unregulated illegal market.”
According to the Department of Cannabis Control’s 2024 market analysis, approximately 38% of cannabis consumed in California comes from licensed sources, which means that 62% comes from unlicensed sources. In Southern California, the Department executed enforcement actions against illicit operators in July-August 2025, seizing $29.9 million in unlicensed cannabis, while statewide enforcement from July through September 2025 has resulted in $222 million in seizures, according to the Department. While commendable, the magnitude of these seizures reveals the stubborn pervasiveness of unlicensed market activity, particularly in Southern California.
Conclusion
Southern California’s licensed cannabis operators face a complex regulatory environment characterized by varying local policies, substantial tax obligations, enforcement challenges related to unlicensed operations, and concerns about permitting process integrity raised by both state auditors and federal prosecutors. The region’s experience illustrates broader questions about regulatory design, local control, tax policy, and enforcement resource allocation that continue to shape California’s cannabis market.