After months of lobbying from local cannabis business owners, the Long Beach City Council agreed Tuesday night to lower the tax rates for non-retail cannabis operations in the city in an attempt to spark growth in sectors of the industry that have lagged since its legalization three years ago.
The resulting ordinance will reduce tax rates for distributors, cultivators, manufacturers and lab testing facilities from 6% to 1%. The previous rate has led to increased prices on products, which are eventually passed on to consumers, industry officials said.
The new tax rates won’t go into effect until an ordinance is brought back to the City Council.
While the vote Tuesday night to reduce taxes was not aimed at the retail side of the industry, lowering taxes on other businesses could have an impact on what the consumer pays. A number of business owners and workers urged leaders to drop taxes as low as possible to help the industry establish itself.
Omer Saar, president of Feel Good Distribution in Long Beach, said that the vote would help create more jobs because more businesses could open in the city with the lower tax rates. He added that the lower tax rates could also help stamp out the black market, which has continued to thrive in the city even though medical and recreational cannabis use is now legal.
“I’m not sure where the downside is, but what I can tell you first-hand is the current tax rate is killing us,” Saar said. “It’s put most businesses out of business and the rest of us that are hanging on are hanging on by a thread and will not be here.”
The drop from 6% to 1% is likely to have an impact on the city’s general fund. A city estimate put that drop in revenue somewhere between $220,000 and $350,000 annually, however, much of the drop in revenue could be offset by the increase in the number of businesses that open, officials said.
However, city projections also left open the possibility that the reduction in tax rates could result in anywhere from 35 to nearly 400 new jobs being created.
As of August 2019 the city had received 618 cannabis business applications, but only 106 of those had been issued a business license. Hundreds remain under construction, under building plan review or pending building plants or initial zoning review.
While the city law adopted by voters in 2016 placed a cap on dispensaries in the city at 32, there is no cap on how many licenses could be granted by the city for other areas of the industry like manufacturing, cultivation and testing.
Long Beach has one of the highest tax rates for non-retail businesses in the area. Los Angeles assesses a 2% tax on cultivation on manufacturing and cultivation and 1% on distribution and lab testing.
Tax revenue from cannabis businesses has stagnated statewide, and this year lawmakers reduced the amount of revenue expected from the industry. Over the past few months local business owners have intimated that if Long Beach tax rates were not lowered, the city could began to leak business to cities with lower tax rates like Los Angeles.
Greg Lefian, a cannabis business owner in the city and member of the board directors of the Long Beach Collective Association, said that he currently employs about 30 people through his retail business in West Long Beach but high taxes had prohibited him from expanding his employee base.
He recognized that the tax revenue to the city would be reduced, but more businesses in operation could result in more money going into the city’s coffers.
“I’m not an economist or actually that good at math, but I know that 1% of something is much more than 6% of nothing,” Lefian said. “And a lot of these businesses are having trouble getting off the ground.”
The impact on the city’s budget was not lost on the City Council. While some members praised the industry for creating jobs and eliminating blight and vacant warehouse space in the city, others focused on the potential cuts that might result from the lost tax revenue.
Councilwoman Stacy Mungo, who represents East Long Beach, said she could support the tax reductions but only if they did not result in negative impacts on staffing and quality of life for residents.
She recounted that the last budget cycle included an intense discussion over where $60,000 to fund Sunday library hours could be found and now the council is considering creating a potential $350,000 loss to the budget.
“Someone bring back a list of cuts,” Mungo said. “But it’s going to be difficult for me if we’re talking about cuts to our libraries, to our parks or to those core services including but not limited to staff.”
With the vote, the council also agreed to periodic reviews of the impacts of the drop in tax rates for non-retail cannabis operations. The ordinance, which will be drafted in the coming months, won’t go into effect until the council approves it twice and at least 30 days after the mayor signs it into law.
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