Want recreational marijuana stores in SLO? Voters need to pass a tax first

San Luis Obispo became the first city in the county to allow recreational marijuana stores when it formally approved a new cannabis ordinance Tuesday, but it won't allow any businesses to open until city voters pass a related tax.

The November election is the soonest that could happen.

City Council also discussed the details of a proposed ballot measure that would ask city voters to approve a cannabis business tax up to 10 percent of gross receipts for retail businesses and up to $10 per square foot for cultivation that could raise $1.5 million annually for the city's general fund.

Those caps are in line with what other cities and counties in California are doing: Santa Cruz and San Jose allow a gross receipts tax for cannabis up to 10 percent. Palm Springs allows up to 15 percent, and Sacramento allows up to 4 percent.

It's also similar to the county's proposed tax. Voters in unincorporated areas of San Luis Obispo County will vote on the June ballot whether to adopt a 4 percent tax that would increase by 2 percent each year to a cap of 10 percent. Testing facilities in the county would not be taxed.

The city's proposed tax ordinance does allow for flexibility.

The initial tax rate would start lower as businesses become established, and different categories of businesses could be taxed at different rates (a sample tax chart of first-year rates showed, for example, testing labs taxed 1 percent, distributors taxed 2 percent and retailers taxed 6 percent).

Future councils could lower or raise the tax at any time, which was important to Vice Mayor Carlyn Christianson who said she wanted to retain flexibility to reduce the tax, "even down to zero."

The discussion comes at a time as some jurisdictions in the state are lowering their tax rates. Grover Beach, for example, is considering reducing taxes from 10 to 5 percent after hearing concerns about the burden on start-up businesses. Any tax imposed by cities is on top of a state excise tax of 15 percent and a cultivation tax up to $9.25 per ounce.

A consultant for the city said the proposed city and state taxes combine to a total tax of less than 30 percent, which is similar to alcohol.

Council members said they had hoped to discuss the proposal with representatives from the industry. Yet only one participated in public comment, leading council member Dan Rivoire to ask, "where is everyone?"

The biggest concern for him, he said, "is whether or not the businesses will be able to handle it."

Industry consultant Sean Donahoe was the lone speaker and said "businesses will never arrive" if taxes are too high at the beginning and other cities ahead of San Luis Obispo are drastically reducing their taxes.

"Moody's Invester Services last week came out with an analysis finding that licensing commercial cannabis activities is a net credit positive activity absent any taxation. So to the extent that sometimes arguments are made that we need to tax to pay for enforcement, that's not what Moody's thinks," Donahoe said.

Some conversation between council members touched on the question of whether taxes too high would encourage a black market, an idea dismissed by council member Aaron Gomez, who said "the black market is always more lucrative. ... People that want to partake in that kind of business will continue to partake in that kind of business."

"Anything that we do here is not going to change that aspect of the business. I think this idea of twisting it 1 percent this way or 1 percent that way is going to have this huge downstream effect of tackling the black market. I don't think it's a realistic idea," Gomez said.

The kind of tax the city proposed requires a simple majority of votes to pass. However, a proposed statewide initiative, if adopted, would retroactively require a two-thirds majority vote to increase any taxes.

"If people want to see cannabis business here in San Luis Obispo, at this point, we need to have potentially two-thirds approval of this ballot measure to make that happen," Mayor Heidi Harmon said, offering an extreme example.

A sample of residents surveyed by the city showed 68 percent would support a cannabis business tax similar to what is proposed.

This story was originally published May 16, 2018 at 5:02 PM with the headline "Want recreational marijuana stores in SLO? Voters need to pass a tax first."