SAN DIEGO —
A proposal to sharply reduce San Diego’s cannabis tax rate for a set of targeted businesses got a key endorsement Wednesday from a City Council committee.
The council’s economic development committee unanimously approved shrinking the tax rate from 8 percent to 2 percent for indoor pot farms and factories that make cannabis edibles.
The tax reduction, which wouldn’t apply to San Diego’s two dozen dispensaries, aims to eliminate a barrier that industry leaders say has discouraged the opening of cannabis production facilities.
Only 19 of 40 city-approved production facilities have opened, creating a gap in the local supply chain that forces some local dispensaries to truck their cannabis into San Diego from elsewhere.
Some critics said lowering the tax rate would cost the city at least $1 million a year, and that the move is not a guarantee that more cannabis production facilities will open.
Others characterized the move as a “bait and switch” by a lucrative industry that promised millions in tax revenue while successfully persuading San Diego officials in 2017 to legalize cannabis production within the city limits.
Supporters said that while revenue would drop initially, estimates show that it would eventually rebound and surpass current levels as the number of local production facilities increases to the city’s cap of 40.
They say the 21 approved production facilities haven’t opened primarily because San Diego has a higher cannabis tax rate than most other cities in California, which makes building large production facilities less appealing to investors.
“In this particular industry, other cities are outcompeting us and illegal operators are thriving as a result,” said Councilmember Raul Campillo, who is spearheading the effort. “Over time, this policy will result in more revenue to our city than the current tax rate.”
The city’s Independent Budget Analyst expressed skepticism about the proposal and suggested further analysis is warranted before the full council votes in coming weeks.
The IBA’s Jordan More said the proposal, which would take effect 60 days after approval by the full council, would likely reduce the $23 million of estimated cannabis tax revenue in the city’s budget for the ongoing fiscal year.
More also said city officials should investigate whether the change in tax rate would truly be the key factor in any production facilities opening because “the tax rate is the one last obstacle.”
A report by Campillo’s staff showed that San Diego has a higher rate than a handpicked group of cities, but the report didn’t compare San Diego to all California cities with cannabis taxes.
The report did note that several other cities have recently lowered their cannabis tax rates after cannabis industry leaders raised similar concerns in those cities about high tax rates discouraging businesses from opening.
Those include Long Beach, which lowered its rate from 6 percent to 2 percent, and Palm Springs, which lowered its rate from 10 percent to 2 percent.
A city analysis says production businesses contribute about $1.3 million a year in taxes, which would drop to about $325,000 with the tax rate reduction. The analysis says that if 30 production businesses start operating and paying taxes, the city would get about $1.6 million in annual revenue — $300,000 more than is generated now.
The situation is complicated because only six of the 19 operating production businesses actually pay tax.
Of the other 13, four are exempt and nine have either refused to pay tax or have yet to sell taxable products. Production facilities are exempt if the same owner also operates a dispensary, with the city getting its tax revenue from those “vertically integrated” businesses when the cannabis is sold to the public.
Councilmember Vivian Moreno said she is optimistic lowering the tax rate would increase revenue long term.
“I think this is a reasonable proposal that in the long run should yield more revenue for the city,” she said.
The IBA said city officials should estimate when revenue would return to current levels before the full council votes.
Councilmember Sean Elo-Rivera said it’s important that revenue doesn’t decrease, contending many of San Diego’s problems as a city are the result of lack of revenue compared to other large cities in California and the nation.