California's largest legal cannabis market is facing widespread collapse

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The legal cannabis market in Los Angeles is hitting a breaking point. At least two-thirds of LA weed businesses have failed to pay their local taxes, and the city is currently out hundreds of millions of dollars in lost revenue.

The dire financial status of the city’s cannabis stores — with more than 500 out of LA’s 738 pot companies owing outstanding taxes — has forced the city to take the extreme step of proposing an amnesty program to bail out the industry, according to a city letter obtained by SFGATE.

The LA Office of Finance is recommending that the city waive all tax penalties for cannabis companies in exchange for the businesses repaying their tax debts under payment plans, according to an Oct. 2 letter signed by Diana Mangioglu, the city’s treasurer, and sent to the LA City Council. Mangioglu said the program was necessary because of the “extremely challenging” business environment.
“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, legally permitted cannabis businesses face a daunting task,” Magioglu wrote in the letter.

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The city’s cannabis companies currently owe the city $400 million in outstanding taxes, with 48 businesses individually owing more than $2 million. The city has previously run tax amnesty programs for businesses citywide, but this would be the first time a program is offered to a specific industry, according to the letter.

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The office estimates that even if the amnesty program is offered, it will only help to recoup $30 million in tax revenue, meaning $370 million is likely already lost. The letter estimates that $150 million of the $400 million in owed taxes is connected to companies that are already out of business, or tied to tax bills that are too old to collect.

The hundreds of millions of dollars in missing tax revenue are sorely needed. LA has been navigating a $1 billion budget shortfall for this fiscal year, although Mayor Karen Bass worked out a deal this summer that her office said closed that budget gap.

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The overall tax rate for cannabis in LA exceeds 40% and includes a 10% local tax, one of the highest local taxes in the state. LA’s regulatory framework forced some business owners to spend over a million dollars on permitting and rent before they could open for business.

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Statewide, total cannabis sales are falling, as operators owe $1.3 billion in back taxes to the state, according to a 2024 state report.

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At the outset of cannabis legalization, LA prioritized giving licenses to people harmed by the war on drugs, including low-income residents and people of color — meaning that a large portion of tax-owing businesses come from these same marginalized groups. Today, many of these “social equity” license holders are now holding millions of dollars in debt and may not even have a functioning business to show for it.

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