California local governments scrambling to find tax revenues during the coronavirus pandemic are turning toward an industry they had considered taboo until now: cannabis.
It has been almost four years since voters legalized recreational marijuana in California, and nearly 70 percent of cities and counties have yet to embrace pot businesses because they see regulatory problems or have concerns about public safety and negative publicity.
But some, facing insurmountable budget gaps as unemployment rises to its worst level since the Great Depression, would now rather open their doors to cannabis than lay off more workers or cut services. So far, a handful of cities have begun developing cannabis tax measures for the November ballot since voter approval is required to add local taxes. It’s a trend many in the industry expect to continue over the next month absent approval of a federal bailout for state and local governments.
“I think at the end of the day you’ll still have those ‘not in my backyard’ arguments,” said Tiffany Devitt, chief information officer for CannaCraft, a large-scale cannabis manufacturer. “But, if a person can’t find a job, or their kids can’t find work, or their jurisdiction can’t raise enough funds to cover basic social services, then people adjust.”
San Bruno, a Bay Area city that two years ago banned marijuana businesses, is among the governments with a change of heart. Last week, city council members voted unanimously to fund a tax measure and public education campaign, while voicing support for the idea of exploring an ordinance that would allow a dispensary or delivery service to open sometime next year.
According to projections from city officials, an operational cannabis shop could reduce San Bruno’s projected $8.2 million deficit in the upcoming fiscal year by around $300,000.
“It’s not gonna solve our problems, but it’s going to keep $300,000 that we desperately need to hire whomever it is to make our city better,” Council Member Marty Medina said at the meeting.
The city of Montclair in San Bernardino County is facing a similar budget crunch as sales tax revenue has cratered following the temporary closure of its mall. There, city officials are considering proposals to repeal a marijuana ban and create regulations for commercial activity. The plan could raise up to $2 million annually, according to City Manager Edward Starr.
While both San Bruno and Montclair are left-leaning cities where a majority of residents voted to approve the Prop. 64 legalization initiative in 2016, Republican-led jurisdictions where voters rejected the statewide measure are also starting to consider cannabis — to the surprise of industry observers.
Last month, council members in Yucaipa asked city staff to begin looking into alternative revenue streams, including marijuana businesses, amid a 15 percent decline in sales tax revenue and increasing public safety costs. Republicans hold a 20-point registration advantage over Democrats in the San Bernardino County jurisdiction, where a majority voted against Prop. 64.
“I’m not opposed to it,” said Councilmember Denise Allen, after city staff asked if they should explore cannabis regulations. “I mean, other cities are taking our revenue right now so it’s just one of those facts.”
Calls for jurisdictions to dive into the legal market have even come from some of the highest levels of state leadership, with Treasurer Fiona Ma calling the tax revenues a potential “game changer” during a virtual round table last month.
However, Michael Coleman, an expert on California local government revenues and spending, warned that cities should think twice before putting cannabis on the ballot, especially if they are also asking voters for a general sales tax increase.
“What a city needs to do that’s really looking at new revenues to help be a piece of this budget solution is preferably one tax, because multiple taxes are going to drag each other down,” he said. “One tax that’s going to generate a substantial amount of revenue. So that’s not going to be cannabis in most cities.”
Among the other jurisdictions that have already begun developing cannabis tax measures or have shown interest in doing so are Sonoma, Signal Hill, Wildomar, Lemon Grove and Yountville. As in Yucaipa, one of the prevailing themes in council meetings elsewhere has been that their residents are sending tax dollars to neighboring jurisdictions by purchasing marijuana products from other cities with licensed stores or from the state’s robust illicit market.
Industry research firms BDS Analytics and Arcview Market Research estimate that unlicensed operations brought in $8.7 billion in untaxed revenue in 2019, compared to the legal market’s $3.1 billion.
According to Jackie McGowan, founder of Green Street Consulting, local leaders are also looking at nearby jurisdictions that have developed their cannabis markets and don’t want to be left behind.
Among those that have already allowed marijuana businesses, Monterey County is counting on $10.2 million in projected cannabis tax revenues to cover general fund shortfalls and avoid layoffs in the upcoming fiscal year and Santa Barbara County leaders believe $10.6 million in marijuana revenue will help offset coronavirus losses.
“I’ve asked myself, ‘Is it worth taking the abuse for supporting the cannabis industry?’” County Supervisor Steve Lavagnino said during a meeting last week. “There’s a lot of negative press and loss of political support. But when I look at the budget this year, I think it’s worth it.”