Prop D Taxes a Struggling Industry
Originally published in The Bay City Beacon on October 22, 3018.
Proposition D, the local tax on cannabis businesses, is one of the lesser-known but very consequential ballot measures facing San Francisco voters this November. We asked the proponents and opponents of the measure to present their arguments. Below is the No on Prop D argument. You can read the Yes on Prop D argument here.
San Francisco has developed yet another way to stifle the City’s cannabis industry, so I felt compelled to lend my two cents on why all San Franciscans should vote NO on Prop D.
In true San Francisco fashion, we found a way to rebel against our own highest ideals. Our city is dense and vibrant, but only in a few chosen places. Our city promotes social justice, but the soil beneath largely black and brown communities’ land is toxic. Our city voted with 73% approval to legalize cannabis in 2016, but our neighborhoods ban cannabis retail.
Now, in an attempt to further kneecap an industry already navigating U.S. Attorney General Jeff Sessions’ federal prohibition, the Board of Supervisors has placed a gross receipts tax on local cannabis operations on the November ballot. The Board aims to tax cannabis retail at a rate of 2.5% on their first $1 million. Revenue above $1 million would be taxed at a rate of 5%. For non-retail cannabis licensees, the rates are 1 percent for the first $1 million, and 1.5% for greater revenue.
In reading the legislative digest, it’s clear Supervisors took time to seemingly address potential industry criticisms. The Board delayed the onset of the tax until January 1, 2021, and exempted the first $500,000 of gross receipts (including all retails sales of medicinal cannabis). Additionally, the measure reduces the voting threshold to decrease the tax from the previously required eight members to a simple majority of the Board of Supervisors, and limited annual increases to one percent.
However, proposing the tax inherently ignores the fragility of the cannabis industry operating within a state bureaucracy still adapting to the legal market, all under a hostile federal government. Cannabis companies typically pay a federal tax rate of 70–90% due to additional burdens under Section 280E of the U.S. tax code. In cash, no less, because banks won’t touch them because of prohibition. Most notably, no business entity in San Francisco pays a gross receipts tax at a rate higher than 0.56 percent.
How can our local businesses thrive, in an industry our city helped create, if we overburden the cannabis companies that choose to do business here?
Cannabis is already struggling in California. KQED reported earlier this year that California cannabis tax revenue is not even half of what was projected so far in 2018. As it stands, existing legal prices reflecting local and state taxes are already driving customers back to the black market. Throw in compliance costs with new regulations and supply chain uncertainties, and cannabis companies all over the state are struggling to make ends meet.
That’s before ever getting into the cost of doing business in San Francisco. We’re lucky to have the cannabis businesses, and greater community, that we do. For that, we have much to thank our city’s legacy within cannabis legalization, particularly its deep roots to the HIV/AIDS Movement. We should honor and attempt to strengthen – not challenge, or burden – that history.
San Francisco’s cannabis entrepreneurs are not Green Rush robber barons. By and large, our city’s local cannabis economy is run by family-owned operations that have been working to bring the benefits of cannabis to market for decades. Their networks and supply chains stretch throughout Northern California, and many times the entire state. As a critical node in the California cannabis economy, crippling operations in the City would further limit the industry’s growth and stability.
Perhaps most importantly, the proposed tax would provide $7-16 million annually to the General Fund. This is the incorrect use of these resources. If there is to be additional revenue scraped from the industry, then it should be for the explicit purpose of correcting the wrongs of the War on Drugs, and mass incarceration. Luckily, San Francisco already has an equity program with those exact aims that these funds could be directed toward.
Currently, there are 117 applicants waiting to participate in the City’s cannabis equity program, which is the only way new retail outlets can open. However, the City has not approved any of them, and all equity applications remain in various stages of review with The Office of Cannabis. More resources clearly need to be dedicated to equity programs, specifically, if our local industry has any potential of reflecting San Francisco’s values of social justice. We should spend more time improving the process that exists rather than attempt to tax our way to a solution.
The cannabis industry’s financial and logistical burden isn’t likely to lessen anytime soon. To compound the problem, Governor Jerry Brown recently vetoed Assembly Bill 1863 – a bill that would have given a tax break to all licensed marijuana businesses by allowing tax deductions under the state Personal Income Tax Law. In this context, San Francisco owes it to this industry to support it in any way we can.
On Election Day (November 6, 2018), vote No on Prop D.