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San Diego lowers some cannabis taxes to encourage more local production

The San Diego City Council on Tuesday approved a reduction to some city cannabis taxes to encourage the opening of more indoor cannabis farms and factories that make cannabis edibles.

The council voted 6-3 to shrink the tax rate on production facilities from 8 percent to 2 percent. San Diego’s two dozen dispensaries will continue to pay the 8 percent rate.

Supporters said San Diego’s tax rate on cannabis production facilities, which is among the highest in the state, is discouraging those businesses from opening in the city.

Only 19 of 40 city-approved production facilities have opened, creating a gap in the local supply chain that forces some local dispensaries to truck their cannabis into San Diego from elsewhere.

Supporters said other drawbacks of having fewer production facilities include fewer local cannabis jobs and greater opportunities for the local cannabis black market to thrive.

“We owe it to our local business owners and those operating legal businesses to have the chance to compete right here in the city,” Councilmember Raul Campillo said.

Critics of lowering the cannabis taxes said San Diego’s overall tax revenues, which have been affected more by the pandemic because the city relies so much on tourism, can’t afford to be reduced in any way.

They also complained San Diego lacks a cannabis equity program to help low-income people and minorities gain access to the lucrative industry that has relatively high upfront costs.

“I’m having a major, major issue with reducing the tax rate for an industry that we have not opened up to everyone,” Councilmember Monica Montgomery Steppe said.

City officials said San Diego’s cannabis equity program is scheduled to be ready for operation sometime this year.

Councilmember Joe LaCava proposed delaying the date of the cannabis tax reduction from May 1 to January 2023 so that the equity program will be in place, but his proposed amendment didn’t receive enough support.

Council President Sean Elo-Rivera proposed adding a three-year sunset clause, which would make it easy for the city to adjust the tax back upward if revenues fall dramatically. That also did not receive enough support.

Supporters of lowering the tax said city revenue would increase despite the lower rate, because so many more cannabis businesses would begin operating and paying city taxes.

But an analysis by the city’s Independent Budget Analyst estimated San Diego will lose between $2 million and $4 million over the next five years by lowering the cannabis taxes. An analysis by the city treasurer estimated a smaller loss in revenue.

Gina Austin, the leading attorney for the region’s cannabis industry, said the IBA analysis was based on the flawed assumption that approved-but-unopened cannabis production facilities will eventually open without a tax cut.

“This is absolutely not true,” said Austin, contending her clients would choose instead to open in other cities with lower tax rates. “They do not intend under any circumstances to stay here if the tax rate does not decrease.”

Councilmember Marni von Wilpert said she was also concerned about lowering the tax rate on businesses that have been inconsistent about paying their city taxes. Von Wilpert noted that the city treasurer has struggled to collect owed taxes from some cannabis businesses, but she ended up voting in favor of the lower rate.

The three votes against the proposal were cast by Elo-Rivera, Montgomery Steppe and LaCava. Because the proposal is a city ordinance, it will require a second approval by the council next month.

San Diego’s cannabis tax was approved by city voters as Measure N in 2016. The ballot measure included increasing the tax rate from 5 percent to 8 percent in 2019, but it also gave the council discretion to move it anywhere between zero and 15 percent.

In a separate vote, the council approved a new annual fee of $20,802 for all San Diego cannabis businesses to cover oversight and regulation by the city’s Cannabis Business Division. The new fee was approved 7-2, with LaCava and Councilmember Chris Cate voting “no.”



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