On Nov. 19, the Oakland City Council will, yet again, vote to reduce the city’s high cannabis taxes. At least, that’s the plan for the moment. The problem is that, as of this writing, council members are still hashing out what the tax rates will be. The Finance Committee late last month kicked around a few different proposals before essentially punting them all to the full council to work out the details. As of Monday, the council was expected to finalize an ordinance at its Nov. 5 meeting. Insiders told me at that point — a day before the vote — that several complicated options were still being discussed.
Sadly, it’s already too late for some cannabis businesses, either those that opened operations elsewhere over the past year or two, or those that decided not to set up shop in Oakland in the first place thanks to the city’s 10 percent tax. That rate sits atop the state’s 15 percent levy, pushing prices for legal pot into the stratosphere and sending consumers to illicit dealers who are now called “the black market,” or to legal shops in nearby cities where the rates aren’t so onerous.
It’s understandable that Oakland levied a high tax at the start. It was the first city in California (and in the country) to tax pot at all, when voters passed Measure F in 2009. The tax was just 1.8 percent of gross receipts collected by medical cannabis clubs (of which there were four in the city at the time), but it had an enormous impact in the long run. Not only did it normalize the notion of taxing pot, it helped to normalize the notion of legalizing it. The tax would “give a huge boost to the legalization movement,” predicted Tammerlin Drummond, then a columnist for the Bay Area News Group. “The fact is, if you’re going to allow the cannabis dispensaries, you might as well legalize pot.”
At the same time, though, the notion of cannabis taxes took hold of politicians across the state, especially as legalization neared. That led to wildly optimistic forecasts for how much revenue the taxes could raise, and wildly wrongheaded notions of how high the rates should be, at both the state and local levels. The problems became immediately apparent to officials in other cities, such as Berkeley, which cut their taxes. But Oakland hung on like grim death even as the black market grew, revenues fell short, and pot businesses actually started fleeing or avoiding the city.
Berkeley cut its rate from 10 percent to 5 percent early in 2018. A guy named John (he didn’t want to provide his last name) told me that even though he lives within walking distance of Oakland’s Harborside dispensary, he often travels to Berkeley to shop, usually at Hi-Fidelity. And even then, it’s only once in a while for manufactured products like vapes or edibles. Most often, he buys flower, illegally, from people he knows. “You can buy buds anywhere,” he said. He pays less than half of what he would pay for raw weed even at Hi-Fidelity.
But retail is only part of the story, and not even the most important one. “This delay has been a great opportunity for Oakland’s competitors — Berkeley, Emeryville, San Francisco, even Santa Rosa,” said James Anthony, a cannabis attorney and founding chair of the trade group Oakland Citizens for Equity & Prosperity.
Much of the most recent dickering over rates among council members has concerned how much and when to tax companies that report more than $5 million in revenue. That includes manufacturers and distributors, which create a lot of jobs. Several such companies have already decided to move at least some operations elsewhere, as when Kiva Confections, a big cannabis chocolatier, opted to open a distribution facility in Santa Rosa rather than in its home base of Oakland. Santa Rosa imposes no tax at all on distributors. Other outfits have decided to go to Emeryville, where the tax on distributors is just 1 percent. Profit margins are very thin for distributors, and Anthony said “Oakland’s 10 percent tax [which is based on gross receipts] is easily more than the margin.”
In May, the council cut the tax rate for small companies — those with gross receipts lower than $500,000 per year — to 0.125 percent, but it delayed action on cuts for bigger companies, continuing a pattern that started last year, when the problems stemming from the high rate became painfully apparent as soon as legal recreational sales began. Everyone expected the council to cut those taxes in half, as Berkeley did. The came counter-proposals and counter-counter-proposals. Councilmember Loren Taylor introduced an amendment to incorporate into the ordinance tax rebates under the city’s Cannabis Equity program, which provides incentives to companies that employ people hurt by prohibition, or incubate companies owned by such people. Other council members added their own amendments delaying the tax cut to 2021, or setting different rates that would be phased in over time. And now the whole thing is a big, confusing mess. One proposal would keep the rate on businesses earning $5 million at 10 percent for the first year, lowering it later. And that rate wouldn’t be marginal: The companies’ entire gross receipts would be taxed at that rate.
Anthony is hopeful that something will be done this month. In the meantime, he said, “these delays have given a great boost to the underground market.”