Measure A: Should San Diego County tax cannabis businesses?

SAN DIEGO — 

A November ballot measure asks San Diego County voters to decide whether to impose a sales tax on cannabis businesses in the unincorporated county.

Measure A would tax gross receipts of cannabis business sales — their total earnings before deducting costs — and set maximum tax rates for different kinds of operations. It’s part of a broader effort by supervisors to overhaul the county’s cannabis policy and expand licenses for legal cannabis operations.

The measure would allow local taxes of up to 6 percent for retail, 3 percent for distribution, 2 percent for testing, either 3 percent or $10 per square foot for cultivation and 4 percent for other related businesses. County supervisors could set rates lower than those limits but couldn’t exceed them.

The Board of Supervisors could also set varied rates within each category and could tax medical marijuana operations at different rates from those levied on recreational adult use. The tax wouldn’t apply to cannabis grown at home.

If the measure passes, supervisors would set tax rates early next year and would try to align them with cannabis tax rates of neighboring cities, said Brian Hagerty, an assistant group finance director for the county.

For instance, retail tax rates in local cities range from 4 percent in La Mesa to 8 percent in the city of San Diego, according to a consultant report by HdL Companies that was presented to the Board of Supervisors in April. The consultants recommended that the county set a retail rate at 4 percent to start.

Although every registered voter in the county can vote on the measure, the tax would only apply to businesses in unincorporated communities. Marijuana operations in cities would not be affected and wouldn’t pay double taxes if their city has an existing cannabis tax.

The county estimates the tax would generate about $2.9 million to $5.6 million annually. That money would go into the general fund and could be used to pay for parks, fire safety, roads, health, social equity and other programs. Supervisors would allocate that money with the rest of the county’s revenue during their annual budget planning process.

A “yes” vote on Measure A signifies support for imposing a cannabis business tax in the unincorporated county. A “no” vote opposes establishing that tax.

The consultant report estimated that cities within San Diego County collect a combined $28.9 million annually from their municipal cannabis taxes, with the city of San Diego getting $19.7 million per year.
According to the San Diego County auditor and controller, the measure could boost general fund revenue from the taxes but also add extra costs related to tax collection, auditing, accounting and administration.

“These revenues and costs are dependent on several unpredictable variable factors, making them difficult to project,” the auditor and controller said in the ballot pamphlet, noting that the cannabis market, regional competition, price fluctuations and business compliance could affect how much money the county receives and what it spends collecting the tax.

The ballot argument for the measure, provided by the board of supervisors, says that it would cover costs of cannabis regulation and help crack down on illegal shops operating in the unincorporated county.

“Measure A is fiscally responsible,” Supervisors Nathan Fletcher, Nora Vargas and Terra Lawson-Remer said in the argument. “By imposing a tax on cannabis businesses, the County’s budget will be protected from any new costs associated with cannabis regulation, and protect resources for investment in our communities, public health, and social equity programs. Additionally, implementing this tax will be important to preserve the County’s resources so that it can continue to fight against illicit cannabis businesses that have proliferated in many of our communities.”

The ballot argument against the measure, by the San Diego Taxpayers Association, says that although it would tax businesses in unincorporated areas, it wouldn’t guarantee the funds would benefit those communities. The “no” argument, which calls the tax “inequity at its worst,” was signed by the group’s president and CEO Haney Hong, former county Supervisor Dianne Jacob, former La Mesa City Councilmember Barry Jantz and certified public accountant Robert Kevane.

“Why place a burden on just a few without actually guaranteeing they will receive the benefit and support their neighborhood needs?” they wrote. “This is a totally UNFAIR tax!”

The supervisors countered that the tax would apply only to cannabis businesses, not to residents of the unincorporated county.

The California State Constitution allows local governments to propose either general or special taxes. General taxes can be used for a wide range of purposes, while special taxes are earmarked for specific use. A general tax requires a simple majority to pass, while a special tax requires approval from two-thirds of voters. Supervisors proposed Measure A as a general tax.

Charissa Japlit, a financial policy and planning manager for the county, said the general tax gives supervisors the ability to allocate funds as needed. “We were able to determine that the general tax would be the most fiscally responsible option and provide us the flexibility to use the funds and manage our resources,” she said.

When the board voted to place the measure on the ballot in August, a number of speakers demanded greater assurance of what it would fund. They called for using it to improve rural communities where cannabis businesses are located, boost enforcement to prevent sales to minors, fund drug prevention efforts and enact social equity measures for communities harmed by the “war on drugs.”

Some advocates involved in advising the county on its cannabis policy are said recently that they are concerned that the measure doesn’t guarantee tax revenue will address the issues of an expanded cannabis industry.

Joe Eberstein, program manager for the San Diego County Marijuana Prevention Initiative, said he doesn’t advocate a vote for or against the measure but worries it wouldn’t tackle potential public health effects of expanded cannabis operations.

“Any money that is raised through these taxes should go to prevention and treatment resources,” Eberstein said, adding that the county should specifically direct funding to youth marijuana prevention and treatment programs.

Anthony Avalos, a member of the San Diego County Cannabis Stakeholders Group, which says it promotes equitable ownership and employment opportunities within the industry, worries that new taxes will disadvantage small, new cannabis operations.

“There is a sense in California that because of the existing state tax, any additional tax creates a financial burden that will push the majority, if not all small cannabis businesses, out of the industry,” he said in a recent interview.

Avalos argued that any new cannabis taxes should benefit communities affected by past drug laws with job training, mental health services and youth programs. “The best way to do that is to seek a special tax that can be used directly for restorative services and for individuals harmed by the war on drugs,” he said.

The consultant report presented to the county in April said that cannabis businesses in California face a more difficult approval process that other companies do.

“Word that a new business or industry is looking to bring hundreds of new jobs to a community is more commonly met with open arms and offers of tax incentives,” it said. “The cannabis industry is perhaps completely unique in that the inherent jobs and economic development benefits are welcomed more grudgingly and met with the disincentive of special taxes.”

Furthermore, the consultants said, state taxes on marijuana operations can total 26 percent. That leaves a small margin for local governments to add their own taxes without exceeding 30 percent — the upper limit it said legal cannabis businesses can sustain while still competing with illegal operations.