Local cannabis taxes in California

Notes for talks to local California elected officials and staff about local taxes on cannabis, to be given in Riverside April 21 and Irvine April 22.

These will be revised.

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Gangs, Ganjapreneurs, or Government: Who gets the money from cannabis?

If it’s illegal, Gangs get the money. Maybe not a cartel. Maybe the guy. The supplier. The weed guy.

After legalization, who gets the money? It’s up for grabs. Who wants it is Ganjapreneurs – entrepreneurs of ganja, or cannabis, or marijuana — legal private sellers. Ganjapreneurs want about all they can get, but I’m going to talk about 4 ways to get revenue for government.

And then 7 reasons you might not collect much as you might want.

4 ways

  1. Fees. Oakland collects $67,000 annually from each of 8 dispensaries. It costs money to regulate. That gets you to break even. Local California governments don’t need voter approval for “A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits,” and so on.

 

  1. Taxing retail

Lots of California jurisdictions do that with medical already. World’s first excise tax on cannabis was voted in in Oakland in 2009.

For Adult Use, case study Denver Colorado population 650,000:

City of Denver has a cannabis excise tax of 3.5 percent tax.

In 2015, that special Denver tax collected over $7.7 million.

That’s over $11 of local revenue for every resident — man, woman, and child. That’s on top of state taxes of 10 percent of retail and 61 cents a gram for bud. [Denver has a city sales tax on everything of 3.65 percent – that collected $8 million; the taxes on Adult Use cannabis in Denver add up to over $24 million for every man, woman, and child.]

But Denver is special. It has about one-eighth of the state’s population, but it sells about 3/8 of the state’s taxed cannabis. There’s the airport, and tourism. Lots of jurisdictions in Colorado don’t have legal sales, so their residents can buy in Denver.

How’s that working? Voters had to approve it up front, and the tax passed 68-32 in 2013. Then Colorado’s strange Taxpayer Bill of Rights required a revote last November, keep the money, and continue the tax, and this time they passed it 81-19.

  1. You can tax production in at least 3 ways.

In 2010, Long Beach and Berkeley and Albany and Rancho Cordova voted in taxes on canopy, or square feet of grow area.

You can tax electricity used by grow operations, as Arcata in Humboldt County started doing.

Another way of taxing production is a weight tax. Here I look again at Colorado – Washington doesn’t allow local taxes at all on cannabis. The city of Aurora Colorado taxes by the gram, by ounce, by weight. Because Colorado first taxes by the gram. Theoretically, by percentage, but in fact, by the gram. The state is in charge of measuring weight — calibrating scales and so on. The locality doesn’t have to invent that. If you want to tax by weight, I would think you will want to wait until 2018, if AUMA’s weight based tax kicks in– so you can piggyback on the state’s measurement system.

  1. Sell it yourself. North Bonneville, Washington is doing that right now. A muncipally owned corporation has the only store in town. Like a Port Authority. Some people say Handcuffs – President Trump will take office and throw you in jail. If a new President goes after anyone retroactively, it’s likely to be sketchy private sellers who violate the Cole Memo. But it’s theoretically possible that you will have the book thrown at you. Honestly, Cease and desist is the worst plausible case.

Now you could have the city own it directly, and local governments don’t pay income tax. But it’s probably safer, legally, to have indirect ownership. North Bonneville is saying its store is tax exempt. That may be right. Less confrontational.

Those are 4 ways.

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You can enact taxes or fees, and some people will pay whatever you want. But not everyone. Here are 7 reasons consumers may not pay your taxes:

  1. Your taxes, combined with state taxes, are too high compared to the black market.
  2. Law enforcement is ignoring the black market.
  3. Loyalty: The black market dealer is the some buyers’ friend, and they want to keep doing business with him.
  4. They grow their own, or get it from someone who does.
  5. No special trip: They work in a jurisdiction with lower taxes and go there every day. Mother.
  6. Sensible special trip: They live so close to a jurisdiction with lower taxes that it makes economic sense to drive there.
  7. Spiteful special trip: They go out of their way to buy in a jurisdiction with lower taxes – spending more on gasoline than they save on taxes. They cut off their nose to spite their face – because they say your taxes are too high and they want to show you.

Wrapping up: Some people hate all taxes, all people hate some taxes, but taxing cannabis is not like taxing milk. And taxing cannabis at a moderate rate may actually make some people you are dealing with a difficult problem by doing the best you can.

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Addendum – fine points that I won’t have time to talk about:

 

Fees on producers are easy to contemplate, but it’s unusual in the larger scheme to tax producers when there is not a “closed” system. A closed system is where everything consumed in a jurisdiction is produced there, and vice versa. Look at the alcohol and tobacco model of state taxes – the producing jurisdiction doesn’t tax. Take tobacco grown in North Carolina and manufactured into cigarettes there. North Carolina doesn’t tax cigarettes sold in California. Those industries don’t create negative externalities. Distilleries and wineries aren’t much trouble for neighbors. So with marijuana, there is the negative externality of smell. Is that such a big problem that it needs to be discouraged? When cannabis is federally legal, states will probably follow the alcohol and tobacco model. For now, collecting state tax from producers, as AUMA proposes, makes total sense. The consumer and producer are in the same state — and nothing leaks from state taxation. Plus, any federal concerns under the Cole memo about leakage to out of state buyers are addressed by taxing producers.

 

In any event, it’s conceivable that people may want a production tax as a backup consumer tax – on the theory that some cannabis will leak from production to consumption – as growers pinch off a little bit for their own use, or pay employees with it.

 

Taxing production makes total sense in a closed system, where anything produced in a jurisdiction is consumed there. But when product leaves the jurisdiction, the externality of intoxication is likely to stay away, also. That leaves the externality of smell – a relatively minor problem, one would think.

 

Taxing consumption need not involve a retail tax, much less an ad valorem tax. Sub-national tobacco and alcohol excises in the United States are imposed by each of the 50 states – all aimed at the consumer, but nearly all imposed before the retail sale, and with the vast majority (if not all) based on weight or volume.

 

 

 

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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