Will the “Taxapolooza” Kill California’s Golden Ganja Goose?

Take Action on State Legislation Imposing Medical Marijuana Cultivation Tax

Update: LA County may scrap its taxation plan.

“If you can’t ban ’em, tax ’em” seems to be the new local government mantra as a new “Taxapolooza” replaces the “Banapolooza” that wreaked havoc on medical marijuana patients’ cultivation rights across California earlier this year. Two dozen cities and counties have moved to put retail and/or cultivation taxes for medical and/or recreational marijuana on the November ballot. In a few places, multiple measures are proposed, some of them pushed by local signature gathering.

On the low end of proposed cultivation tax rates are Yolo County, which is looking at charging $2 per square foot, and Calaveras County, which is proposing charging $2 per square foot for outdoor gardens, and $5 for indoor ones. Humboldt County is considering charging $1 per square foot for outdoor gardens, $2 for mixed-light, and $3 for indoor.

At the high end are Cathedral City, which is proposing charging $25/sq. ft. cultivated, plus $1 for every gram of cannabis concentrate and every unit of cannabis-infused product; and Coalinga, which is set to enact a $25 per square foot tax for the first 3,000 square feet, and $10 per square foot thereafter. Monterey County, which just voted to put a measure taxing farms at $15/square foot, and automatically raising that rate to $20 in 2020 and $25 in 2021. In addition, the Monterey proposal would tax nurseries at $2-$5 per square foot, and gross receipts at $5-10%.

Other measures would tax at the retail level, notably Los Angeles County, which is proposing a 10% tax on gross receipts to pay for homeless services and the city of Santa Barbara, which wants to enact a whopping 20% on both medical and recreational pot. Watsonville is looking at a 7% tax plus 2% on manufacturing, and Cloverdale a sliding scale up of to 15% tax on all kinds of businesses (sales, cultivation, distribution, delivery and testing).

All taxes would be on top of local sales tax, and any state tax that is enacted. A pending measure in Sacramento, Rep. Wood’s AB 2243, would enact a statewide tax on medical marijuana production between $4.75 and $13.25 per ounce, depending on the size of the farm where it’s cultivated. (UPDATE 8/15: AB 2243 failed to advance in the legislature.) If the AUMA legalization measure passes on the November ballot, a state tax of $9.25 per ounce on all commercially cultivated cannabis will be enacted, plus a hefty 15% state excise tax, in addition to the existing sales tax and local taxes.

Another two dozen or so jurisdictions across California already add special taxes for marijuana businesses. The trend began in the city of Oakland in 2008 when, as attorney James Anthony recalls, “I proposed 1.2%, and when it was taken to Councilmember De La Fuente, he said, ‘Why not 2.4%?’ Two years later they raised it to 5%.” Now the city of Los Angeles taxes at an extra 6%, San Jose takes an extra 10%, and other places like Santa Cruz, Shasta Lake and Richmond also have added taxes at the retail level. Berkeley and Albany add a 2.5% tax on gross receipts, and also charge up to $25/sq. ft. for cultivation.

Local taxes are a winner at the ballot box: several of them passed in 2010 and again in 2014.

Things are getting ever more complicated: Long Beach, which already taxes both retail sales and cultivation of medical marijuana, just voted to add taxes on pending recreational businesses, including “any business located in Long Beach that engages in the manufacture, testing, processing, distributing, packaging or labeling of marijuana or cannabis-related products, medical or non-medical, for wholesale to other retail marijuana businesses that sell those products to customers.”

Desert Hot Springs made headlines when it projected bringing in $17 million yearly by licensing several large cultivation facilities at a tax rate of $25 per square foot for the first 3,000 square feet and $10 per square foot thereafter. A crimp in their plan was discovered when it turns out the city’s electrical grid may not support the proposal. Meanwhile, Humboldt County has enacted a policy requiring carbon credit purchases from indoor growers, as the result of a lawsuit settlement.

The architect of the Desert Hot Springs model is David McPherson from HdL Companies, which provides “revenue enhancement” and consulting services to local governments in California. McPherson worked on implementing local medical marijuana policy as head of revenue in Oakland, before he was reportedly forced out of his job in 2015 after the city was sued for breach of contract by a company that alleged he stole their software.

At a presentation of local tax options specific to Mendocino county in May, McPherson said HdL was currently partnering with Monterey, Santa Cruz, and Placer counties to develop local tax proposals. HdL, which advertises its Medical Marijuana Consulting Program on its website, stands to rake in $75,000 from Marysville alone, to “develop the marijuana business tax program and to review the initial license applicants to determine suitability.” In other places where HdL is already under contract to cities and counties, they earn a percentage of tax revenues recouped through audits.

Another consultant with ties to the League of Cities and the Republican party is advising the city of San Bernardino on their medical marijuana policies. The League was instrumental in pushing cultivation bans across the state, in advance of a now-lifted March 1 deadline in the new state law.

The problem is, no one knows where the “sweet spot” of taxation is: the point at which governments can recoup revenues without driving the market back to underground suppliers. Lt. Gov. Gavin Newson’s Blue Ribbon commission on marijuana legalization was cognizant of this fact, but had no specific recommendations for desirable tax rates.

Locals with dollar signs in their eyes are no doubt looking at the taxes recouped by jurisdictions like Oakland, which took in an estimated $4 million in 2015 from marijuana taxes. But it’s expected that the wholesale price of marijuana will drop following legalization, making taxes that increase after a few years especially nonsensical, points out Jackie McGowan of Central Valley NORML, who has been closely tracking local policies via the Facebook group California City and County Ban Watch. “They’re going to kill the Golden Goose,” warned McGowan.

“Taxes are obviously two-edged: they normalize and institutionalize regulatory legal systems, but they hurt patients financially,” Anthony said. “The latter issue will be solved either by economies of scale, or by the underground market, at which point we might also encounter downward tax competition between neighboring jurisdictions.” Anthony predicts this will happen in 3-5 years.

In the meantime, look for more jurisdictions make a grab for the Golden Goose before the August 12 deadline for putting tax measures on the November ballot, and in 2017 if Prop. 64 passes.

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