A proposal to sharply reduce the cannabis tax rate in San Diego for a range of targeted businesses received key approval from a city council committee on Wednesday.
The council’s economic development committee unanimously approved reducing the tax rate from 8% to 2% for indoor pot farms and factories that make edible cannabis products.
The tax cut, which would not apply to San Diego’s two dozen dispensaries, aims to remove a barrier that industry executives say has discouraged the opening of cannabis production facilities.
Only 19 of the city’s 40 approved production facilities have opened, creating a loophole in the local supply chain that forces some local dispensaries to truck their cannabis to San Diego from elsewhere.
Some critics have said the reduction in the tax rate will cost the city at least $ 1 million per year, and that the move does not guarantee the opening of other cannabis production facilities.
Others have called the move the ‘bait and switch’ of a lucrative industry that pledged millions in tax revenue while successfully persuading authorities in San Diego in 2017 to legalize the production of cannabis within limits. from the city.
Supporters said that although revenues would initially drop, estimates show that they would eventually rebound and exceed current levels as the number of local production facilities increases to the city’s 40 cap.
They say the 21 approved production facilities have not opened primarily because San Diego has a higher cannabis tax rate than most other cities in California, which makes building large production facilities less attractive. for investors.
“In this particular industry, other cities are surpassing us and illegal operators are thriving as a result,” said board member Raul Campillo, who is leading the effort. “Over time, this policy will generate more revenue for our city than the current tax rate. “
The city’s independent budget analyst expressed skepticism about the proposal and suggested that further analysis is warranted before the full council vote in the coming weeks.
Jordan More of the IBA said the proposal, which would take effect 60 days after full board approval, would likely reduce the estimated $ 23 million in estimated cannabis tax revenue in the city’s budget for the current year.
More also said city officials should consider whether changing the tax rate would really be the key factor in opening up production facilities because “the tax rate is the last hurdle.”
A report from Campillo staff showed that San Diego has a higher rate than a handpicked group of cities, but the report doesn’t compare San Diego to all cities in California with cannabis taxes.
The report noted that several other cities recently lowered their cannabis tax rates after cannabis industry executives raised similar concerns in those cities about high tax rates discouraging businesses from. to open.
These include Long Beach, which lowered its rate from 6% to 2%, and Palm Springs, which lowered its rate from 10% to 2%.
An analysis from the city indicates that production companies contribute about $ 1.3 million per year in taxes, which would drop to about $ 325,000 with the reduction in the tax rate. The analysis indicates that if 30 production companies started operating and paying taxes, the city would get about $ 1.6 million in annual revenue, or $ 300,000 more than what is currently being generated.
The situation is complicated because only six of the 19 active production companies actually pay taxes.
Of the remaining 13, four are exempt and nine have refused to pay the tax or have not yet sold taxable products. Production facilities are exempt if the same owner also operates a dispensary, with the city deriving its tax revenue from these “vertically integrated” businesses when cannabis is sold to the public.
Board member Vivian Moreno said she was optimistic that lowering the tax rate would increase income in the long run.
“I think this is a reasonable proposition which in the long run should generate more income for the city,” she said.
The IBA said city officials should estimate when revenues will return to current levels before council votes.
Council member Sean Elo-Rivera said it was important that incomes not decline, saying many of San Diego’s problems as a city are the result of a lack of income compared to other major cities in California and the country.