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Will Taxes Kill California’s Golden Ganja Goose?

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Economics

Will Taxes Kill California’s Golden Ganja Goose?

The world’s largest marijuana market is getting ready to legalize, and local cities and counties are looking to cash in.

Estimates put the California recreational marijuana market around $7 billion yearly, with $1 billion recoupable in state taxes. Now, with Prop. 64 to legalize adult use set for the November ballot, voters in two dozen cities and counties will also be looking at measures to tax medical and/or recreational marijuana at the local level.

Local taxes are a winner at the ballot box: several of them passed in 2010 and again in 2014. Two dozen jurisdictions across California already add extra retail taxes for medical marijuana businesses, notably Oakland, San Jose, Los Angeles, Santa Cruz and Shasta Lake.

Coming in on the low end of newly proposed cultivation fees is Yolo County, which is looking at charging $.50 per square foot. for CBD-dominant strains and $1.75 per square foot. for high-THC strains. Calaveras County 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 Desert Hot Springs and Coalinga, which just approved a $4-million sale of its former prison to be used as a marijuana growing and manufacturing facility. Both are set to enact a $25 per square foot tax for the first 3,000 square feet of cultivation, and $10 per square foot thereafter. Monterey County just voted to put a measure on the ballot taxing farms at $15 per 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 percent.

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

All these taxes would be charged on top of local sales taxes, and any state tax that is enacted. A pending measure in Sacramento, Rep. Jim Wood’s AB 2243, would levy 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. If the AUMA legalization measure passes on the November ballot, a tax of $9.25 per ounce state tax on all commercially cultivated cannabis will be enacted, plus a hefty 15 percent excise tax.

The architect of the Desert Hot Springs taxation 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. HdL, which advertises its medical marijuana consulting program on its website, is currently partnering with Monterey, Santa Cruz, and Placer counties to develop local tax proposals. The company 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.”

“Taxes are obviously two-edged: they normalize and institutionalize regulatory legal systems, but they hurt patients financially,” Oakland-based attorney James 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 many more jurisdictions making a grab for tax dollars before the Aug. 12 deadline for putting tax measures on the November ballot. It remains to be seen whether the newly legalized cannabis market will flourish or perish under such heavy taxation and regulation.

What do you think? Are the proposed marijuana taxes excessive?

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