Last Tuesday, San Franciscans made it clear that they support a new city tax on recreational cannabis sales. After 65.8 percent voted in favor of Proposition D, the measure will levy a gross receipts tax on pot sellers that make over $500,000 annually at a rate between 1 and 5 percent (dependent on whether the business is a retail operation and what its gross revenue is).
While former District 10 Supervisor Malia Cohen is no doubt thrilled with the results — she introduced the measure in June — other people have expressed displeasure.
Eliot Dobris, communications director for San Francisco’s Apothecarium dispensaries, worries that voters may not have fully understood what they set into motion by supporting Prop. D.
“Unfortunately, when you increase taxes on cannabis, you increase prices on cannabis,” Dobris explains. “That strengthens street dealers on the illicit market. That’s something that I suspect a lot of people who voted for Prop. D did not consider: that the primary beneficiaries of their vote for cannabis taxes was not really the city’s coffers, but actually street dealers who now have more competitive pricing.”
Unquestionably, one of the largest issues facing the still young legal cannabis market is how to stay competitive when unregulated sellers are offering an untaxed — and thus, often substantially cheaper — alternative.
Prop. D won’t go into effect until Jan. 1, 2021, but with legal sales in California already lagging behind initial projections, these increased prices may exacerbate the problem. In August, Newsweek reported that statewide sales were $35 million short of where Gov. Jerry Brown predicted they would be back in January. Some delayed returns were to be expected, given the sluggish rollout of regulations in critical municipalities like Los Angeles County, but the bottom line is hard to ignore.
For David Goldman, president of Brownie Mary Democratic Club of San Francisco, one of the underlying problems with Prop. D is how the tax isn’t limited solely to retail establishments.
“We believe that if the folks who voted for this tax increase knew that medical cannabis cultivators, manufacturers, and distributors would be taxed, they might have voted against it,” he says.
When SF Weekly spoke with Cohen earlier this year, she emphasized that her measure was constructed in a way to ensure that the businesses and operators who could least afford additional taxes would be protected. Indeed, Prop. D exempts any cannabis enterprise that earns less than $500,000, but companies making in excess of that amount will be facing the highest gross-receipts tax levied on any industry in San Francisco.
“I think the taxation levels set with Prop. D are just too high,” Dobris notes. “They’re five times the level of any other gross-receipts tax on any other category of businesses. It just seems like a little too much for a brand-new industry.”
Conversely, the numbers set by Prop. D are actually lower than Oakland’s gross-receipts tax currently in place in Oakland — a fact proponents like Cohen and fellow supervisor Aaron Peskin pointed to often in their defense of the measure. However, Prop. D is constructed in such a way that San Francisco’s Board of Supervisors will eventually have the opportunity to increase rates to as high as 7 percent (a choice that will result in some serious backlash from the industry).
Arguably relegated to a footnote in the conversation surrounding Prop. D is what precisely the potential funds will be used for. At present, San Francisco officials plan to deposit the estimated $7-to-$16 million raised annually into the city’s general fund. It seems a shame that no percentage of this forthcoming revenue was earmarked to better serve San Francisco’s fledgling equity permit program, established to help members of disenfranchised communities receive an equal opportunity to participate in the regulated cannabis market.
With a growing need for practical business education and a myriad of sometimes-complex regulations to process and understand, one could easily see what a difference using the profits collected under Prop. D to establish say, a cannabis entrepreneur program at City College of San Francisco, might make. Instead the public remains fully unaware of what these funds will ultimately be used for.
In the interim, Goldman hopes the Board of Supervisors will opt to lower the tax rate to levels comparable with non-cannabis-related businesses. If precedent is any indicator, that seems unlikely to happen. All that is known for sure is that in the next couple of years, legal cannabis in San Francisco is about to get more expensive.