City will wait to adjust cannabis taxes while it studies economic impact

The cannabis industry in Long Beach will have to wait a little longer for any changes in the tax rates charged to non-retail businesses after the City Council voted Tuesday night to have staff take a deeper look at what slashing tax rates would mean for the city’s bottom line.

A citywide cap of retail dispensaries stands at 32 but the number of non-retail businesses like cultivation, distribution, lab testing and manufacturing that are trying to break into the city is well over 200. However, many of the 248 proposed non-retail facilities in the city have yet to open and the city is looking to lessen the burden by potentially lowering tax rates to speed up the process.

The idea of broadening the cannabis tax base was brought to the City Council by 9th District Councilman Rex Richardson, who chairs the city’s Economic Development and Finance Committee. A referral from the committee earlier this year sought to create a two-year pilot program to lower taxes for non-retail cannabis businesses in an attempt to get more of them opened.

Currently, the city charges 6% on gross receipts to labs, manufacturing and distribution cannabis businesses and $12 per square foot to cultivators. Those taxes generated about $1.3 million for the city’s general fund over the last two fiscal years.

City’s like Los Angeles, Oakland, San Francisco and San Diego have lower rates nearly across the board for non-retail businesses. With the exception of Carson and West Hollywood, which charges no tax to medicinal non-retail businesses but 7.5% to adult-use versions, Long Beach has some of the highest non-retail taxes in the region.

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Richardson said that if the city wants to ensure that it reaps the benefits from an emerging industry like cannabis it needs to lower barriers to entry. He added that the industry has the potential to bring good jobs to the city and with it, tax revenue that funds parks, police and fire services, so it’s the responsibility of the city to examine how to make it easier for that industry to exist.

“If we want the manufacturing of cars or spaceships to take root in a city and produce jobs we would be looking at what incentives can be put in place to ensure we receive those benefits,” Richardson said.

Tuesday’s vote will look at what the impact would be to lower the city’s tax rate for non-retail cannabis business from 6% to a more competitive rate that would rival Los Angeles’.

Richardson asked for a report to examine the impacts of lowering the city’s non-retail cannabis rate of 6% to somewhere between 1% and 3%.

The report will also revisit the city’s design and construction standards as well as potential to allow share-use of facilities between two different businesses in an attempt to bring more businesses online faster. Richardson also requested a jobs impact report be included but no clear timeline on when any of the reports would come back was given.

A staff report showed that a reduction of 1% of the tax rate would lead to a loss of about $120,000 in the general fund, and a $1 reduction in the square footage tax charged to cultivators would result in a loss of about $58,000.

Ajay Kolluri, the city’s cannabis program manager, advised the council that lowering rates could make the city more competitive with Los Angeles, which up to this point hasn’t been a factor in operators opting not to locate  in Long Beach, but could be in the future as it opens up its application process.

“At that point Long Beach may no longer be able to compete for new non-retail cannabis businesses locally,” Kolluri said. “If competitiveness and the ability to attract new non-retail businesses locally is the primary concern then City Council may consider reducing non-retail cannabis tax rates to a level more in line with the city of Los Angeles.”

Representatives from the cannabis industry were in attendance at Tuesday’s meeting holding signs with the hashtag #IncreaseTaxRevenue scrawled across the bottom. They bemoaned the fact that the council again pushed off a decision on lowering taxes.

Elliot Lewis, who owns Connected Cannabis Co. on Second Street as well as three other retail locations, said he has licenses in process for distribution and manufacturing but the city’s tax rates have made him hesitant to develop them.

He said that other cities in the region like Los Angeles, Lynwood and Montebello have better rates and that’s where most of the manufacturing and distribution exists for the industry. While Long Beach was one of the first to legalize the industry, Lewis said the city could risk losing it if they don’t lower taxes.

“They will lose every manufacturer and every distributor over time if they don’t move to lower the tax rates,” Lewis said.

Lewis said that the cascade of taxes have led to an overpriced product that has forced many buyers to continue to buy from the illicit market where products are cheaper, but also lack the regulation and safeguards of the products sold in licensed shops.

He said he and other shop owners would be open to putting funds aside to help pay for enforcement to help clamp down on illegal deliveries undermining licensed shops in Long Beach.

“My own friends don’t come in and buy cannabis at our shop because it’s too expensive,” Lewis said. “It’s an ongoing joke that they can’t buy at our shop and they’re just buying on the illicit market. It’s an ongoing thing and they have to address it.”

The New York Times reported in January that the California legal market had actually sold less legal cannabis in 2018 than it did in 2017. The $2.5 billion in sales from 2018 represented a drop of $500 million from 2017. Much of that has attributed to the tax rates at both the state and local levels that see nearly half the sale price of cannabis products lost by retailers in the form of taxes.

Earlier this year the state government scaled back what it expected to collect in cannabis tax revenue by over $220 million.

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Adam Hijazi, president of the Long Beach Collective Association, said that the industry does not have time to wait another three or six months for a report to come back that the City Council may or may not vote on.

“If we had unlimited time we could come back and do this next year,” Hijazi said. “But, we’re just going to kill 50% of the businesses or they’re just not going to operate their licenses.”

Hijazi is currently in the buildout process of a cultivation site at his retail location, The Green Room, on Seventh Street. He said that something needs to be done to tip the balance of power back to the legal storefronts, noting the figure discussed during the meeting that statewide upward of 75% of sales are still made on the black market.

While lowering the retail rate was something Hijazi and other operators would like to be looked at, he’s hopeful that lowering taxes on the production side in the interim will can help retailers bring more customers through their doors.

“It will trickle into the retail because we’ll be able to be more competitive with our cost of goods sold,” Hijazi said. “If we’re getting it for lower we’ll be able to lower the price.”

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Jason Ruiz covers City Hall and politics for the Long Beach Post.
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