Long Beach may look at lowering taxes on some cannabis businesses, but how big the cuts end up being will have a big impact on the city’s annual budget, which is projected to receive about $12 million in taxes from the industry.
The City Council’s Budget Oversight Committee heard potential options for lowering the tax rates in the city, which are currently 8% for adult use sales and 6% for medicinal sales and $13.41 per square foot of cultivation.
City staff laid out options Tuesday for the committee to consider including eliminating some taxes completely, which would create a large hole in the budget; the city has depended on this revenue since cannabis sales fully came online.
This year’s budget is proposing using cannabis tax revenue to fund things like a new REACH Team and other homeless services, including encampment cleanups. It also calls for about $2.2 million to pay for code enforcement, fire inspections and city management salaries.
Some of the conservative options would cap the amount of cannabis tax revenue the city takes in, potentially at $12 million, with any additional revenue being refunded to businesses or reducing tax rates for equity business operators.
Councilmember Suzie Price, who was one of the more vocal critics of legalizing cannabis sales, said that when the council pushed Measure MA, a city-backed tax structure approved by voters in 2016, it did not know how much money the the city would need to ensure that illegal operators did not pop up across the city.
But after years of quiet operations in Long Beach, the city now has a better idea of what it needs to police the industry, but the revenue generated from cannabis taxes is now being used to fund a host of city services.
“We’re basically taxing this industry to pay for things that we need to cover as a city simply because of the product they are selling,” Price said.
State lawmakers agreed to eliminate a statewide cultivation tax and to pause an excise tax paid to the state at 15%, but operators still pay local taxes like those established by Measure MA as well as regular sales taxes that all retailers pay.
Reducing the adult use retail sales rate from 8% to 6% would result in a loss of about $2.4 million, according to the city presentation.
But eliminating it and the cultivation tax, one scenario presented to the committee, would not only reduce cannabis tax revenue by about 90%, it would also require a vote of the people to raise rates in the future.
Industry advocates have successfully pushed for the reduction of taxes in some corners of the industry, like testing and manufacturing, but the bulk of the $12 million generated from cannabis taxes comes from adult use retail sales.
That accounted for about 81% ($9.7 million) of the cannabis tax revenue received by the city last year and retail storefront owners have said the tax structure will lead to closures as the illicit market continues to leach sales from legal operators.
Elliot Lewis, who owns multiple Catalyst brand dispensaries in the city, has forcefully called for a zeroing out of cannabis taxes charged to retailers, saying that it’s an existential issue for business owners who are struggling to survive.
Lewis said Tuesday that there are things that cannabis taxes are paying for that should already be covered by the city’s general fund.
“The same guy that inspects my bar is the same guy that inspects my cannabis business,” Lewis said, referencing the nearly $453,000 tied to fire department salaries.
Adam Hijazi, president of the Long Beach Collective Association, said that businesses are already seeing a decline in sales this year, some as high as 40%.
He pointed to other municipalities like Los Angeles and the county that are looking at tax rates that are about half of what Long Beach is and said the solution is not to tax certain parts of the industry differently.
“Pitting equity operators against others in the city is a really horrible way to go about it,” Hijazi said. “All businesses should be treated equally.”
Price asked that a report come back to the committee looking at how cutting retail taxes to somewhere between 4% and 8% would affect the city and how the city could find alternate ways of funding city services without as much cannabis tax revenue.
Other committee members were supportive of having other options presented to them, but the full City Council will ultimately be the body that decides on what future cannabis tax rates might be.
The council is currently in the process of approving the upcoming fiscal year budget that has been balanced with the help of remaining American Rescue Act dollars, but those are expected to be gone by next year.
The city is currently projecting a $25.6 million deficit for the 2023 fiscal year budget that starts in October 2023, which could make large cuts to city revenue sources a tough decision for council members.