Up in smoke

The city is making some interesting moves this budget cycle, one of which surprised me: A proposal to cut tax revenue while simultaneously trying to avoid service decreases. 

Cannabis operators have told the City Council (for years) they are paying too much in taxes. The council could soon take steps to shave off a few million in taxes for operators in the city. 

I’m old enough to remember when the city was hesitant about allowing cannabis sales back into Long Beach.

The industry was seen as nefarious and potentially dangerous, but also as a potential money drain for a city that was already struggling to staff its police department. 

One former councilmember said the city would be lucky to “break-even” given the ramp-up in police officers the city would need to avert what some implied would be a scene out of Narcos playing out in the city’s streets.

That was about eight years ago. I spent many muggy nights inside First Congregational Church in Downtown, where the cannabis task force—assembled to vet the merits of the industry—toiled away for almost a year before the council ultimately blocked the industry from reopening.  

The industry hit the streets and collected the signatures necessary to get the issue on the ballot to let the voters decide, and the city quickly followed to ensure that when voters approved it, the city would get a cut of the action. 

The city’s Measure MA tax, which added an excise tax of 8% for adult use sales, 6% for medicinal sales and created a tax structure for everything from cultivation to lab testing, has generated between about $10 million and $13 million over the past few years. 

That ranks cannabis taxes as the 12th largest stream of revenue for the city’s general fund. And this tax revenue largely goes toward general fund-type services, like police, encampment cleanups and park maintenance.

The city’s cannabis tax is in addition to the regular 10.25% sales tax that is also applied to all sales, the same as when you buy a t-shirt from Target. However, how sales tax is applied is not as straightforward as it is for other brick-and-mortar stores. 

California’s cannabis tax allows for compounding of taxes, meaning the city’s MA tax, the state’s excise tax and local sales taxes are not charged on the value of the product itself but they’re applied to the total after each tax is applied. 

Some industry operators believe this drives up the “on-paper” tax of about 32% closer to 41%. A state bill to eliminate this practice was put into suspense this year, meaning it’s not dead, but it will have to wait until next year’s legislative session to move forward.

Because of this structure, it’s unclear how much sales tax the industry actually pays, but if MA is projected to generate about $11 million this year—this is including the proposed tax cuts—the cannabis share of sales tax could be somewhere in the neighborhood of $15 million, of which the city would keep a small piece. 

The city will consider reducing the tax by as much as 4%, which is a meaningful reduction, according to the operators I’ve spoken with this week. It could allow them to charge lower prices, which could bring in additional customers and help offset the “lost” revenue from the MA tax by propping up regular sales tax figures. 

However, dispensary operators want the city to advocate for change at the state level, where an excise tax nearly twice the size of the city’s (15%) is charged to operators that generate hundreds of millions for the state’s budget every year but is threatening to kill the cannabis industry that voters legalized in 2016. 

Whether you agree with cannabis products being available for purchase next door to your local Starbucks, the city has recognized that it will need to expand its tax base to survive the loss of oil revenue in the coming years. 

Leaning into making cannabis more affordable, and perhaps even part of its future tourism plans, could help bring some more green to the city’s general fund. 

WHAT YOU SHOULD KNOW THIS WEEK:

A week after the city’s Planning Commission denied an appeal from residents that sought to block Legend’s on Second Street from building the first permanent parklet in Belmont Shore, the city could approve two more outdoor dining spaces in that community. The city’s zoning administrator is set to hear two proposals Monday that could allow a new permanent parklet to be built outside Open Sesame and an outdoor dining area to be added outside The Win-Dow, which is replacing Archibald’s. Resident groups in the area who say parklets will decrease parking, safety and quality of life in Belmont Shore have vowed to challenge parklet applications in the area, so both of these projects could be headed to the Planning Commission for a future appeal. 

PAY ATTENTION TO THIS NEXT WEEK:

The city’s budget presentations roll on this week and Public Works, a department that’s expected to be very busy over the next few years, is scheduled to unveil its budget Tuesday night. The department rolled out a second ambitious five-year plan last week that details a slew of new projects and others that will get additional funding over the next five years as the city prepares for the 2028 Olympic games. It also has over $41 million in bonds that it must spend on fixing city streets over the next five years to avoid penalties from the federal government. Like other departments, Public Works has a large amount of vacancies, so it will be interesting to hear what the department’s approach will be going into the new fiscal year. It will also be a good opportunity to learn more about any new projects that might be getting worked on in your neighborhood.