Cannabis Tax Could Rise as Santa Barbara Scrambles to Close Budget Deficit

The Santa Barbara City Council is considering increasing the cannabis excise tax rate from 6% to 8%. The proposal is part of the finance committee’s broader initiatives to generate additional revenue for the general fund and to address an estimated $5.9 million deficit for fiscal year 2026.

During a meeting of the Santa Barbara City Council on February 24, 2026, the finance committee recommended the tax rate increase as a ‘Tier One’ revenue-generating strategy. 

The finance committee specifically recommended not increasing the tax for cannabis purchases related to medicinal use.

While the existing recommendation is to increase the rate to 8%, officials noted that the city has the authority to increase the tax rate up to a maximum of 20%.

The committee voted 2-1 to move the item forward to the city council. 

In October 2025, the finance committee suggested raising the cannabis tax to its maximum rate of 20% as a potential measure to increase city revenue and reduce expenses.

In October 2025, the finance committee suggested raising the cannabis tax to its maximum rate of 20%, as a potential measure to increase the city’s revenue and cut expenses. 

Santa Barbara County imposes a tax on cannabis businesses in unincorporated areas. Transfers between licenses are also taxed. 

Budget Deficit and Reserve Crisis

The cannabis tax proposal comes amid a somber update on Santa Barbara’s financial condition, with staff reporting that the budget deficit was higher than originally anticipated in the adopted budget and that expenditures are consistently outpacing revenues.

If no corrective action is taken, the city will entirely exhaust its contingency reserves (the 10% policy target) by the end of fiscal year 2026, staff told the City Council. Additionally, all general fund reserves are expected to be completely depleted by the end of fiscal year 2028.

Looking ahead, the base budget deficit for fiscal year 2027 is projected to widen to $14.6 million. 

To close the gap, the city is considering adopting a combination of temporary and ongoing solutions. These include: 

• Tier One initiatives, such as revenue increases and cost reductions, which are projected to save $4 million.
• An assumed $2.9 million from a potential revenue measure on the November ballot.
• $1 million in savings from holding vacant positions open for extended periods. 
• An additional $5.4 million in yet-to-be determined expenditure savings. 

Major tax sources, such as sales tax and the Transient Occupancy Tax, have plateaued following a post-pandemic rebound. However, expenditures also continue to climb due to high inflation, pension obligations, and sharp increases in insurance costs, which have jumped 20% annually for city facilities over the last few years. 

The city could also lose around $4 million in federal funding for essential services such as harbor dredging, which could fall to the general fund as a “backstop” if other revenue sources are not identified.