The biggest bottleneck to the development and expansion of the legal cannabis industry across California has been local governments banning commercial marijuana companies.
That roadblock could morph into more of a speed bump after the November election, when at least 82 cannabis-related ballot measures are slated to go before voters in cities and counties around the state, according to information NORML shared with Marijuana Business Daily.
The tally includes local cannabis ballot measures in 10 counties and 58 municipalities.
Marijuana businesses throughout California are keeping particularly careful watch on the following types of initiatives:
- Those aiming to establish local cannabis taxes, typically on gross receipts and per square foot of cultivation. Such taxes would set the stage for municipalities to begin approving regulations for cannabis entrepreneurs to operate within their borders.
- Measures that could create more licensing opportunities.
- Those intended to discourage cannabis companies from entering particular jurisdictions because the tax rates are so high – say, 25% of gross receipts and $30 per square foot of canopy for growers.
The majority of the state’s MJ-related initiatives are asking voters to approve marijuana business taxes, and that’s “often the first step to opening businesses up,” said Ellen Komp, deputy director of California NORML.
“For the most part, once a local tax is in place, entrepreneurs rush in to make proposals, demonstrate to the city they can be responsible business owners and … things do move forward.”
Dustin Moore, a principal at Main Street Strategies who also worked on the Proposition 64 campaign in 2016 – which legalized recreational cannabis in California, said the coming election is nearly as important as Prop 64. That’s because so many local jurisdictions in the state have maintained MJ business bans.
November’s more than 80 local initiatives will help chip away at that resistance to the industry, he said.
“This election will be another watershed moment,” Moore predicted. “This sets the stage for a local government push to really start opening up licensing.”
Only 180 of California’s 540 municipalities and counties have passed laws to allow MJ business licensing of some kind, according to CannaRegs, which tracks local MJ regulations around the state. The rest – a whopping 67% of California’s local governments – have banned commercial cannabis.
“I think we’re going to see that, on election night, the majority of the voters who supported Prop 64 are going to overwhelmingly support these tax measures,” Moore said.
Komp agreed, adding that additional business taxes on the California ballot historically tend to pass.
Not just that, but most of the local campaigns are low-profile in fairly small jurisdictions, meaning they’ve drawn little to no fanfare or controversy and will likely appear to most voters as ballot questions that ask if they support legal cannabis or not.
“A tax on the ballot is almost a sure thing. There have been very few exceptions,” Komp said of the likelihood a tax measure will pass.
Still, Moore stressed, “there will not be a windfall of new jurisdictions opening,” because most of the state’s localities still won’t be issuing MJ company licenses, even if all the local ballot measures were to pass this year.
Questionable tax rates
However, there’s a wide range of taxes and policies included in the initiatives, and some even appear designed to discourage MJ companies from entering jurisdictions by setting high tax rates, NORML’s Komp said.
“Because the state excise tax is so high, at 15%, adding local taxes is really making it difficult for a lot of people competing with the black market,” Komp said.
That means even if voters were to approve all the ballot measures, it wouldn’t result in every one of those jurisdictions immediately welcoming cannabis companies. Plenty of businesses may not want to operate in towns or counties where they’ll have to pay hefty taxes as well, Moore noted.
For instance, Measure Z , which the Hemet City Council placed on the ballot, would allow the city to tax MJ companies up to 25% of gross receipts and up to $30 per square foot of canopy for cultivators. (There’s also a competing initiative in Hemet – Measure Y – with much lower tax rates.)
Those numbers are on the high end compared to other local ballot measures this year, with most asking for 10% or less on gross receipts and $10 or less per square foot of cultivation.
But it’s a factor that many companies will take into account when deciding where to locate their headquarters and even when choosing what niche of the cannabis sector to enter, Moore said.
“The cities we’re seeing opening up now are going to be more suited for retail,” Moore said. “It’s not sustainable when you look at manufacturing, distribution and testing in particular.”
Moore noted that manufacturers and distributors will look for areas that tax them either at 0% of gross receipts or only a few percentage points, which some localities already offer.
Initiatives to watch
Komp said one of the most politically important measures for businesses is Measure V in Oakland, which would give city officials the power to lower MJ taxes instead of raising them.
That, she said, will likely be a bellwether for the industry: Other municipalities will notice if Oakland follows the lead of neighbors such as Berkeley, which lowered its cannabis tax rate earlier this year because city officials wanted to remain competitive with other Bay Area municipalities.
“All of the measures on the ballot, I believe, say that local officials have the power to tax up to a certain percent, because there’s already downward pressure on local taxation, especially in Oakland,” Komp said.
“Businesses are leaving Oakland because the tax rate is too high, and they’re going to surrounding communities that are offering a better tax rate.”
Another initiative to watch will be in Los Angeles, where Measure B would create a public bank that cannabis companies could use. Although the ballot measure isn’t on its face marijuana-related, the bank would be almost certainly flooded with requests for services from MJ companies.
Meanwhile, a contentious initiative on the ballot in San Francisco, Proposition D, would raise taxes on MJ businesses with gross receipts of $500,000 or more.
Licensed cannabis businesses contend the added price burden driven by such tax hikes could push customers toward the black market.
The city’s existing MJ business taxes are already about 5% for retailers and 1.5% for nonretailers that have at least $1 million in gross receipts, with slightly reduced rates for companies with lower gross receipts, according to San Francisco cannabis consultant Menaka Mahajan.