Taxes get higher on newly legalized pot as California cities and counties move to take their own cut

Reporting from Sacramento —  As the marijuana industry celebrates the passage of an initiative legalizing recreational marijuana in California, more sobering news came from local elections, where voters in 37 counties and cities — including Long Beach, San Diego and San Bernardino — approved ballot measures imposing separate local taxes or fees on pot.

Now, some activists and industry leaders are worried about the affordability of legal marijuana as cities and counties pile their own taxes of up to 15% on top of the 15% state excise tax approved by voters who passed Proposition 64.

“We are very concerned about the problem of overtaxation,” said Dale Gieringer, director of the California branch of the National Organization for the Reform of Marijuana Laws. He noted that cultivation taxes in Proposition 64 boost the state’s tax hit on the industry to close to 25%.

“Throw in another 15% in local taxes, and there will be a very strong incentive for growers to evade regulation and sell on the illegal market,” Gieringer said.

Local officials, including Long Beach Mayor Robert Garcia, say they needed to adopt their own taxes and regulations to accommodate the particular concerns of the residents of their cities and make sure they have money to police the new marijuana businesses.

“It allows us to properly regulate, license and provide the public health services that we need to regulate this new industry,” Garcia said. “It also ensures that we have enough public safety on the policing side so that we are following the rules and everyone is a good neighbor.”

Long Beach voters approved rules that will allow the licensing of about two dozen medical marijuana dispensaries in the city and set tax rates for medical dispensaries at up to 8% of gross receipts and for recreational shops, if they are ever approved by the city, at up to 12%.

Proposition 64 gives cities and counties broad authority to set local regulations, including a limit on the number and location of marijuana businesses — and the power to ban them. However, the ballot measure does not allow cities to prohibit adults from growing, using or transporting marijuana for personal use.

The Long Beach tax eventually could generate about $13 million for city services.

Marijuana legalization activists, including former Los Angeles Police Deputy Chief Stephen Downing, opposed the approved tax as excessive, saying it puts an “enormous immoral burden” on medical marijuana patients and enables “a competitive black market.”

In San Bernardino, voters approved Measure O, which lifts the city’s ban on medical marijuana dispensaries, allowing up to five to operate under city licenses and pay fees based on their square footage.

Some of the marijuana taxes approved by voters are in cities that still have a moratorium on pot businesses as local officials decide what restrictions to adopt.

On Nov. 8, voters rejected marijuana tax measures in just two cities, according to preliminary election results, including Colfax, where a special tax measure that required a two-thirds vote — others required majority votes — fell just short of approval. A tax measure in Avalon that would have permitted up to two medical marijuana dispensaries also failed.

The success rate for the marijuana tax hikes compared with other kinds of tax measures is a bit surprising, according to Michael Coleman, a fiscal policy adviser for the League of California Cities. But he said voters in some cities appear to simply be recognizing the likelihood that marijuana businesses are coming.

“The voters are saying, ‘If we are going to have it in town, then let’s apply a tax to it and get some revenue from this activity to benefit the community,’ ” Coleman said.

Updates from Sacramento »

Allen Hopper, an attorney who represents marijuana firms, agrees with Coleman that other local ballot measures taxing and regulating pot are likely to come in many of California’s 482 cities and 58 counties as they scramble to catch up to the new statewide law legalizing recreational marijuana use.

“You are going to see only more of this given the specific authorization in Proposition 64 for local governments to do that,” said Hopper, who helped organize a state blue ribbon committee whose recommendations led to the initiative. “As strapped for cash as local jurisdictions are, it’s not surprising they are doing so.”

In Santa Barbara, where the law allows up to three medical pot dispensaries in the city, 70% of voters last week approved Measure D, which allows the City Council to levy a tax of up to 20% on gross receipts for medical and recreational marijuana businesses. There is currently a moratorium on recreational sales while the City Council weighs rules on those operations.

Taxes as high as Santa Barbara’s have riled up industry leaders, including Aaron Herzberg, a partner at CalCann Holdings, a medical marijuana licensing and consulting group.

“Both the state and local governments apparently view marijuana as a way to quickly raise significant tax revenue, and they all want to get their hands in the cookie jar,” Herzberg said. “The taxes that have been passed and are being proposed are exorbitant, and there is a big danger that if such high taxes are imposed, the black market will continue to thrive.”

In all, there were some 60 local measures on the Nov. 8 ballot involving taxing or regulating marijuana in California.

Voters in 11 counties and cities, including Laguna Beach and Upland, rejected ballot measures that would have allowed some pot businesses to operate, but with restrictions.

In Laguna Beach, 71% of voters rejected Measure KK, which would have repealed the city’s years-old ban on medical marijuana dispensaries and allowed two to open in the city.

In Upland, nearly two-thirds of voters turned down Measure U, which would have allowed licensing up to three medical marijuana dispensaries in the town.

Eight other local ballot measures allowing pot businesses — but with limits — were approved, including in the cities of Costa Mesa and Stockton.

A slight majority of Costa Mesa voters approved Measure X, which allows medical marijuana development, testing and wholesale distribution in an industrial part of town but does not lift the ban on retail dispensaries.

In Stockton, voters approved ballot measures allowing up to four medical cannabis dispensaries, as well as cultivation sites, and boosting a business tax on medical marijuana firms.

As more cities create taxes and regulations, some activists hope market forces will reduce the burden on consumers.

“Communities that impose too high a tax on marijuana will of course face competition from those that don’t,” said Gieringer, the head of the California branch of the National Organization for the Reform of Marijuana Laws. “In the end, market competition will probably bring local taxes to a reasonable level. But the likelihood of a robust black market is high given the total taxation level mandated under Prop. 64.”

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