The Long Beach City Council voted Tuesday for city management to look at how retail cannabis tax rates could be lowered to help a struggling industry in the city, as operators say they can’t compete with an illicit market that is still thriving in part because of its ability to charge lower prices.
Long Beach currently charges an excise tax of 8% on adult-use cannabis sales and 6% on medicinal cannabis sales on top of the normal 10.25% sales tax that other retailers in the city have to pay.
Combined with other state taxes, industry members say these taxes have forced them to charge high prices at retail locations that have led to sagging sales and businesses on the brink of closing.
While this is not the first time that the industry has asked for tax relief, the city will now look at cutting the tax rate to help cannabis operators in the city level the playing field with illegal operators.
“Our current cannabis tax structure makes it difficult to compete,” said Councilmember Joni Ricks-Oddie, who introduced the item.
Ricks-Oddie said she believed that, with a measured approach, the tax reductions could have a host of benefits like increased sales and a larger tax base for the city, as well as the potential to bring some illegal operators into compliance with city laws.
Before cannabis sales were legalized in Long Beach in 2016, there was reluctance among council members at the time to welcome the industry, as some said an increased cost on things like police patrols could mean the city would lose money or “break even” at best.
Cannabis, though, has been one of the surprisingly high-performing areas of the city’s tax revenue streams, with it generating $13 million in the last fiscal year. It’s projected to create another $12 million this year.
In 2022, $9.9 million of the $13 million collected by the city came from taxes charged to adult-use customers, according to city data.
Most of those funds come from adult-use retail sales, with smaller portions coming from things like manufacturing, lab testing and distribution licenses.
Options for cutting cannabis taxes are expected to return to the City Council to consider alongside this year’s proposed budget, which generally is released in July or August and must be adopted by October, when the new fiscal year begins.
Long Beach is facing a projected $6 million deficit, which is down from an original projection of over $40 million, but significant cuts to cannabis taxes could add to that sum without additional funding or cuts.
Industry operators have called for cuts as big as 5% for adult use sales and a zeroing out of medicinal cannabis taxes, but it’s unclear how big of a range of cuts the council will be presented with.
Ricks-Oddie’s request included Santa Ana’s recent cannabis tax reductions as an example. That city reduced its taxes by 1% across the board with an additional 2% in cuts granted to businesses that met certain labor benchmarks like providing full-time hours and pathways for advancement to its employees.
‘Equity’ tax cuts
While the city’s 32 dispensary operators will have to wait a few months to find out how much their tax rates will be cut, other lower-income business owners could soon see theirs reduced by half.
On Tuesday, the council asked the city attorney to bring back an ordinance that would amend the tax rates for “equity” license holders, which are prospective business owners who have been negatively affected by the war on drugs, come from underserved parts of the city or are generally less wealthy than other cannabis operators in the city.
Those business owners will see a tax rate of 4% for adult use sales, 3% for medicinal sales and a cultivation tax of $6.85 per square foot. City leaders hope that the tax reductions will allow more equity applicants to actually launch their businesses.
Of the 32 dispensaries in the city, none are equity applicants. However, the City Council voted in May to allow eight additional dispensary licenses to be reserved for equity applicants in the future.
The tax changes that will be in the requested ordinance will have to be voted on by the council twice before the mayor can sign the changes into law.