San Diego County voters will be asked to authorize a tax system for marijuana businesses in the unincorporated areas on the November ballot, after the Board of Supervisors this week approved a marijuana tax ordinance.
In a 4-1 vote, with Supervisor Jim Desmond voting no, the supervisors agreed Tuesday to add a marijuana tax ordinance to the county books and and place a measure for marijuana taxation on the ballot.
The measure is a step in the board’s plan to expand options for cannabis businesses in unincorporated county. By opening the door to new, legal marijuana operations, county officials hope to eliminate the black market for marijuana and redress the social and economic impact of past “War on Drugs” policies on minority and low-income communities.
The board considered how to set tax rates on marijuana businesses that would cover the cost of developing and administering a cannabis program, including permits, enforcement and other operations, and also provide general tax revenue to the county.
Mark Lovelace, a cannabis consultant and former Humboldt County supervisor, described how taxes at various stages of the industry including cultivation, distribution and retail add up to an overall tax rate on the consumer product.
“We recommend that local tax rates be set to try to keep the cumulative rate at or below 30 percent,” he said. “The development of the program itself should be value neutral to the county. That leaves any revenue generated by the cannabis tax available for whatever spending priorities the board may choose: public safety, health and social services, roads and infrastructure, social equity issues or any other government services.”
Lovelace said that 99 of 113 local cannabis tax measures introduced in California have passed, but cautioned that their success depends on the type of taxes they authorize. A general tax that’s not designated for specific spending or programs requires a simple majority of voters to pass. But a special tax, which devotes money to certain purposes, must gain a two-thirds majority. Only two of the six special cannabis tax measures on California ballots have passed, he said.
Board Chair Nathan Fletcher said the county should pursue a general tax, adding that the board could decide later how to use that money within the county budget.
“I think using a general tax is the right approach,” Fletcher said. “As a board at a subsequent date we can make decisions about how to appropriate general tax dollars.”
He added that the tax measure should apply only to marijuana businesses in the unincorporated county, saying it would be burdensome to shops within city boundaries to pay both county and city taxes.
“It would be disastrous for county government to start imposing additional taxes on other jurisdictions that already have their own cannabis systems in place, and there would be no compelling argument for double taxing them from a local government standpoint,” he said.
Desmond didn’t state his reasons for voting against the plan, but asked whether the tax ordinance would include a fee for marijuana lounges that allow customers to consume the product on site. Because that could require additional traffic enforcement on surrounding roads, he said it should be factored into the tax plan.
“There’s the potential for them to have tasting rooms or smoking rooms,” he said. “And no tax was mentioned for those types of purposes. We need to have cost recovery for more sheriff’s or law enforcement if they’re going to be using it on site.”
Speakers expressed varying responses to the proposal, with some saying a 30 percent total tax rate would be too high for businesses to remain competitive, while others urged the board to maximize marijuana taxation and use the funds for prevention and enforcement.
Lincoln Fish, CEO of Outco, one of the existing cannabis businesses in unincorporated San Diego County, said excessive tax rates could undermine the county’s goal of regulating marijuana production and sales by driving prices higher than those of illegal shops.
“We’re not opposed to taxes, but we want to see them applied appropriately and used appropriately,” Fish said. “There’s a myth that cannabis is just a huge profit center. The truth is most cannabis businesses in California are actually losing money right now, and a big part of that is taxation. It makes it difficult to run a business, but it also forces consumers to go to the black market.”
Cannabis justice advocate Anthony Avalos said taxes should be reduced or waived for new cannabis businesses.
“We should create a tax plan that not only supports local business, but also discourages the proliferation of the legacy (unregulated) market,” he said. “We need a pathway for social equity entrepreneurs to be successful. Simply granting them licensure is not enough. Social equity licensees would pay zero taxes for the first seven years of operation.”
Another speaker said the taxes should be set high enough to cover public costs including youth marijuana use prevention, minor decoy operations and code enforcement of product labeling.
“This is the beginning of recognizing that there are real costs to marijuana consumption to young adults, families, neighborhoods and society in general,” she said. “The costs are extremely high in mental health costs alone.”
The board will make a final vote on the ordinance and tax measure at its meeting June 14, and place it on the ballot in November.