At its Dec. 3 meeting, the Long Beach City Council voted unanimously to reduce cannabis-business tax-rates for manufacturers, distributors and testers of marijuana products from 6% to 1% in an effort to attract more such businesses to the city and increase jobs.
Ajay Kolluri, manager of the Office of Cannabis Oversight in the city manager’s office, said that cannabis tax-rates can range from 0% to 12% by law, as approved by Long Beach voters, and currently range from 6% to 8%.
Kolluri presented results from a study the council had requested in July analyzing the fiscal and jobs impact of reducing taxes for manufacturers, distributors and testers of cannabis products according to different scenarios based on rates of 1%, 2% and 3%.
Kolluri said that while cannabis retailers account for 71% of city revenue in the 2020 budget, or about $3.2 million, manufacturers, distributors and testers of cannabis products account for only 11% of projected revenue, with cultivators contributing the remaining 18%.
He further noted that Long Beach cannabis-tax rates are competitive with local cities except for the City of Los Angeles, which imposes a 2% tax on manufacturers and 1% on distributors and testers.
“This is noteworthy for the fact that L.A. is our direct neighbor and widely considered the future hub of commercial cannabis activity,” Kolluri said.
Reducing taxes would theoretically make the city more competitive for those currently under-represented businesses in the city, but it is only one of many variables, he noted.
The City currently projects a tax-revenue loss from this segment of the cannabis industry of about $223,000 at the current 6% tax rate, Kolluri said. A “low” growth-rate of five new business licenses, for a total of 57 total new licenses, would still result in a revenue loss of about $210,000 with a 3% tax rate. The only projection that yields a relatively small increase of about $4,500 in revenue at the 3%-tax rate is a “high-growth” scenario of 50 additional licenses.
“In nearly every scenario, the General Fund continues to project a net-revenue loss from a reduction in cannabis tax-rates,” Kolluri said. “Staff projects that reducing cannabis business license tax rates will result in a fiscal-year 2020 General-Fund revenue loss of between $220,000 and $350,000, depending upon the rate selected.”
In terms of jobs, Kolluri said that the industry currently employs 674 in the industry, based on a consultant’s survey of 60 respondents. Reducing the tax rate could generate anywhere from 35 to 390 additional industry jobs. Of those, testing labs hire the most on average and offer the highest salaries, Kolluri said.
During public comment, only one resident– Larry Goodhew– objected to lowering the tax rate.
“What the City Council should do is set the rate so it is the highest in this country,” he said. “What would be next? Are you going to legalize prostitution?”
But several other members of the public expressed support for a 1% or lower tax rate, citing pressure on businesses to compete enough to survive, given the alternative of lower-priced black-market products.
Omer Saar of the distributor Feel Good Sales Group was one of those.
“If you’re concerned about the safety about the residents and you want to put out the black market, making licensed businesses more competitive will help do that,” he said. “The current tax revenue is absolutely killing us. It’s put most businesses out of business.”
Hab Haddad of Greenpoint Group consulting advocated a tax rate of less than 1%.
“California’s regulated market is spiraling down toward a collapse from taxes on business and consumers, widening the price gap between illicit and regulated products, which will further drive consumers to the illicit market, […] putting people’s lives at risk.”
Elliot Lewis, owner of retail dispensaries, also advocated for a 1% rate.
“I think you’ll see an explosion of growth,” he said.
Gregory Lefian, CEO of Chronic Pain Relief Center and member of the board of directors of the Long Beach Collective Association, to which several of the public speakers also belonged, said he employs 30 people in his retail business.
“I know that 1% of something is much more than 6% of nothing and a lot of these businesses are having trouble getting off the ground,” he said.
Every council member also expressed support for the tax-rate change, mostly citing the need to grow the industry to create jobs, though remaining conscious of the impact to the budget.
Councilmember Rex Richardson said he was especially interested in creating manufacturing jobs and said the three facilities he recently toured employ skilled workers.
“What I saw was investment,” he said. “What I saw was jobs. What I didn’t see was vacant warehouses.”
Richardson also estimated that the impact to the approximately $550-million General Fund would be only .0004% to 0006%, which he said was small compared to potentially creating nearly 400 new jobs. He made a motion to lower the rate to 1%.
Councilmember Al Austin seconded the motion, citing the need to remain competitive in the region.
“Cannabis is a revenue and jobs generator,” he said.
Austin also asked staff for a report comparing manufacturing tax rates with other industries and to analyze the impact of lowering the tax rate after 18 months.
Councilmember Suzie Price also expressed her support of the change, citing the high cost of starting a testing lab and the value of regulated products.
“As a prosecutor, I see every single day what happens when substances are mixed together without having gone through consumer protections,” she said. “It can be deadly.”
Vice Mayor Dee Andrews suggested an even lower tax rate of .5%.
“We need a new kickstart,” he said. “If we don’t make money, we create crime […]. Jobs will stop a bullet.”
Charles Parkin, city attorney, said that the council will need to approve a forthcoming ordinance changing the tax rate with a minimum of five votes, which would take then effect after 30 days.
