L.A. Wants to Tax Its Illegal Dispensaries. The Legal Ones Say That’s the Wrong Fix.

A June ballot measure would charge unlicensed cannabis shops the same tax rate as licensed operators, potentially generating $30–35 million a year. But critics say it will legitimize the illicit market — and make City Hall financially dependent on it.

By Jo Tanaka | May 1, 2026

Los Angeles has an illegal cannabis problem that’s both enormous and, by the city’s own admission, roughly the same size as its legal one.

An August 2025 report from the city’s Office of Finance estimated that L.A.’s unlicensed cannabis market is approximately equal in scale to the licensed market it was supposed to displace. Five years after Proposition 64 took full effect, the city built a regulatory apparatus, licensed hundreds of operators, and collected billions in fees and taxes — and the illicit market barely blinked.

Now, with a cash-strapped budget and a legal cannabis industry that owes the city nearly $400 million in back taxes, officials are trying something different: tax the illegal operators too.

Measure CB, on the June 2 ballot, would impose the same gross receipts tax on unlicensed cannabis businesses that licensed dispensaries already pay — 10% on cannabis sales, 5% on medical cannabis, and 2% on manufacturing, cultivation, or other commercialization. City estimates project it could generate $30 to $35 million annually for services including street repairs, 911 emergency response, fire protection, and parks. That revenue projection would shrink as more illegal businesses are shut down, though the measure’s supporters see that as a feature, not a bug.

“Cannabis is one of the few industries in the city in which illegal businesses aren’t taxed,” said Councilmember Katy Yaroslavsky, who chairs the budget committee and helped shepherd the measure to the ballot. At a January 27 meeting, she called the current situation a “loophole” that disadvantages compliant operators while letting unlicensed shops operate tax-free.

The City Council voted 10-2 in February to put the measure before voters.

Councilmember Bob Blumenfield offered the most blunt justification at the same hearing. “They didn’t get him for being a gangster,” he said, invoking Al Capone. “They got him for tax evasion.” The implication: even if the city can’t shut down every illegal dispensary, it might be able to pressure them through the tax code.

The Problem With Taxing Criminals

The theory is intuitive. The execution is murkier.

Luis Rivera, executive director of Social Equity LA — a nonprofit that organized with local cannabis business owners to oppose the measure — points to the most obvious flaw: there’s no guarantee illegal operators will actually pay.

“There’s no guarantee or mechanism to assure that illegal operators will pay the taxes or fulfill their obligations,” Rivera told the L.A. Times. A shop operating outside Proposition 64’s licensing framework isn’t going to file a tax return voluntarily. And while the city could theoretically use delinquent tax bills as a legal hook for enforcement, it still needs to find the businesses, document their sales, and collect — an enforcement challenge that has defeated regulators for years.

But Rivera’s deeper concern isn’t the collection gap. It’s what happens structurally if Measure CB passes and some illegal operators do pay.

“The measure risks legitimizing the illegal cannabis industry,” he said, “while linking city finances to the tax revenue the businesses would generate.” In other words: if City Hall starts budgeting around illegal dispensary tax revenue, it may develop a subtle institutional interest in keeping those shops open. The Al Capone argument cuts both ways — Capone got caught because federal agents were single-mindedly focused on putting him away. A city that’s collecting $30 million a year from illegal shops is in a different position.

Social Equity LA also argues the measure undermines Proposition 64 itself, which requires cannabis businesses to be licensed. Taxing the unlicensed without requiring licensure muddles the legal foundation of the whole system.

The Licensed Industry Has Its Own Problems

This debate is playing out against a backdrop of significant financial stress in L.A.’s legal cannabis sector.

Licensed cannabis businesses in the city collectively owe approximately $400 million in back taxes — a figure that includes $100 million in penalties and $35 million in interest, according to an October 2025 Office of Finance report. In March, the City Council moved to create an amnesty program that would forgive late fees and interest for businesses that pay their outstanding city taxes within three years. The scale of that delinquency tells a story about how many licensed operators are themselves struggling to survive.

Daniel Sosa, who owns four licensed dispensaries in Los Angeles, put the competitive reality plainly to the Council. He said he is competing not just against unlicensed shops but against other licensed dispensaries that also aren’t paying their taxes — effectively getting the same illicit competitive advantage through delinquency that unlicensed operators get through non-compliance.

From Sosa’s vantage point, the core issue isn’t the tax rate: it’s enforcement. Measure CB doesn’t fix the enforcement gap. It creates a new revenue stream from a parallel, unregulated universe.

Rivera, for his part, argues the answer isn’t taxing more businesses into the system — it’s lowering the tax burden for those already in it. California’s combined state and local cannabis tax burden has long been cited as one of the primary reasons licensed operators struggle to compete on price with illicit alternatives. The state’s 15% excise tax, on top of local levies, means a legal gram can cost nearly twice what an unlicensed shop charges for the same product.

What Rescheduling Changes — or Doesn’t

The timing of Measure CB coincides with a shifting federal landscape. The Department of Justice’s rescheduling order, which moved state-licensed medical marijuana to Schedule III of the Controlled Substances Act, is already generating ripple effects across the West Coast. The Treasury Department and IRS have signaled that significant tax guidance is forthcoming — including, potentially, relief from Section 280E, the provision that bars cannabis businesses from deducting normal business expenses from federal taxes.

If 280E relief materializes, it would substantially improve the financial picture for licensed California operators. But it wouldn’t touch state and local tax burdens, and it wouldn’t close the unlicensed market.

California accounts for roughly a third of the entire U.S. legal cannabis market by revenue. That the state’s largest city is still grappling, six years in, with an illicit market of equivalent size to its regulated one is a sobering data point for the rest of the country. Whether taxing the illegal shops is a creative enforcement lever or a formal concession that the unlicensed market isn’t going away — L.A. voters will have their say on June 2.

Jo Tanaka covers the West Coast cannabis market for CannabisInquirer.com.