California cities, counties cut marijuana taxes to aid struggling companies

August 22, 2023 · MJ Biz Daily

An increasing number of county and local elected officials across California are acknowledging a longtime cannabis industry grievance – legal companies’ taxes are too high – and cutting local levies on retail sales, business operations or both.

At least 14 cities and counties in the state – including key consumer markets such as Los Angeles and San Francisco as well as less-populated, production-focused areas like Calaveras and Humboldt counties – have reduced or eliminated local sales, business or cultivation taxes over the past year, according to research compiled by Hirsh Jain of Ananda Strategy, a Los Angeles-based consultancy.

The trend reflects a growing acceptance among elected officials that legal marijuana in the state’s roughly $6 billion market is simply too expensive for California consumers who can patronize a still-thriving illicit market that regulators and law enforcement have been unable to punish out of existence.

Cannabis sales in California are subject to a 15% state excise tax as well as state sales taxes, which range from 7.25% to as high as 10.75% in some areas.

That’s on top of any local taxes that cities and counties might choose to impose.

The tax cuts are welcome but limited relief for a struggling industry desperate to stay afloat amid familiar pressures.

Advocates say the collapse this summer of Herbl, a major distributor alleged to have left a string of unpaid invoices across the state, is a sign of things to come unless major changes are made.

The tax cuts reflect a stark departure from the attitude in legalization’s early days, when local governments saw marijuana industry tax revenue as a new source of revenue to backfill budgets and avoid more difficult conversations around spending priorities.

But it’s also a demonstration that the help legal businesses say they need is more likely to come in the short to medium term from local lawmakers than at the state level.

“These local jurisdictions arguably need the revenue more than the state does,” Jain told MJBizDaily. “These cities are making practical decisions to preserve a struggling industry.

“That’s why it’s all the more disappointing the state’s not getting the memo.”

Cuts across the state

Among the cities that have cut taxes in the past year are:

  • Berkeley, where lawmakers voted in July to extend an across-the-board local tax exemption until 2025.
  • Cathedral City, which cut a retail tax from 10% to 5% and offered further cuts on cultivation and other business taxes.
  • Long Beach, which cut local taxes for social equity businesses and is offering further benefits for small companies that meet certain so-called “good employer” requirements.
  • Palm Desert, which cut a gross receipts tax on retailers from 10% to 5%.
  • San Francisco, which delayed imposing a local tax rate entirely.
  • Santa Ana, which cut taxes across the board.

Counties with recent cuts include:

  • Calaveras.
  • Humboldt.
  • Mendocino.
  • Monterey.
  • San Luis Obispo.
  • Sonoma.

‘Help people who are following the rules’

Upscale wineries and sprawling farms dot the hills in San Luis Obispo County on California’s Central Coast, a popular weekend-getaway destination where cannabis companies have struggled to find a solid foothold.

Part of the reason is that retail operations are banned in unincorporated areas of the county, which has been a “very arduous place for the cannabis industry to do business,” admitted county Supervisor Dawn Ortiz-Legg, who was elected in June 2022.

Another reason is a 2018 voter-approved law that imposed a gross-receipts tax on cannabis businesses that was scheduled to increase from 8% to 10% on July 1 – unless the county Board of Supervisors intervened.

Recognizing that cannabis is a “fledging” industry – which, as Ortiz-Legg described it, is “somewhat in freefall” – the board voted in late June to cut the gross-receipts tax on cannabis businesses to 6% instead.

“All industries when they first start out are on rocky roads at first,” she told MJBizDaily.

“I think it’s our responsibility to help people who are following the rules and paying bills. Instead of being penalized, they should be supported and helped.”

Ortiz-Legg said she pushed to cut taxes further, to as low as 4%.

“In my opinion, we really need to be helping them a lot more than we have,” she added.

“The harder we make it for legal participants, the easier we make for the (illicit) market.”

Taxes ‘one piece’ of the puzzle

Economists stress that high taxes are only one pressure point for legal marijuana businesses in the state, where much of Proposition 64 – the 2016 voter-approved legalization law – can be changed only at the ballot box.

For example, industry observers have long lamented how little retail capacity there is in a state as large as California, which encourages consumers to patronize illicit-market options – including illegal delivery services and stores.

A representative of the League of California Cities, or CalCities, one of the major statewide lobbies involved in crafting Prop 64, said the organization had no comment.

The influence of CalCities, observers say, helped enshrine the “doctrine” of local control in state law, meaning cities and counties can strictly zone or ban cannabis retail entirely.

However, even CalCities’ guide for local lawmakers on how to regulate cannabis warns against taxing marijuana too heavily.

“(T)he key is to strike a balance so that taxes are not so high that they deter operators from doing business legitimately and encourage them to continue in the illegal market.”

And skeptics point out that other states – chief among them Washington with its 37% effective tax rate when state and local levies are tallied – also have high taxes but don’t suffer the same problem as legal businesses in California.

In the Golden State, stiff regulations – including environmental-protection laws as well as a licensing process that can leave would-be growers or sellers paying expensive commercial rents for months or even years without any revenue coming in – are also “a really big deal for legal cannabis,” said Daniel Sumner, a distinguished professor at the University of California, Davis, where he chairs the school’s Cannabis Economics Group.

“It’s not like starting a dog-walking business.”

“People tend to emphasize taxes because it’s an easy thing. ‘Oh, reduce taxes from 15% to 10%,’” said Robin Goldstein, the UC Davis Cannabis Economics Group’s director, who with Sumner co-wrote a book-length study, “Can Legal Weed Win? The Blunt Realities of Cannabis Economics,” published last summer.

“But when you put all the taxes together, that’s one small piece of what’s making it hard for legal weed to compete with illegal weed,” he said.

Still, doing away with local taxes “is visible and easy,” Sumner added.

“And the biggest thing about cutting taxes is that it does show, to some degree, that local jurisdictions sort of get it.”

‘Regulate cannabis like kale’

Ultimately, Goldstein argues, if policymakers want legal marijuana to be successful, they would do well to follow models from other stable and profitable industries.

“One thing we talk about is regulating cannabis like kale,” he said.

“If you want your county or your city to have the best benefit of reaping benefits in terms of jobs, regulate the industry like you do other prosperous sectors of the economy – which is to say like a normal agricultural product.

“The idea that you have to set up a special system for cannabis, with special stores that can sell nothing else, on top of all this other stuff you’re piling on top of it, is really not learning from the lessons of what’s succeeded in other industries.” (Full Story)

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