ENCINITAS — The Encinitas City Council recently adopted a resolution to endorse sponsoring a ballot measure allowing voters to consider a tax increase on the city’s fledgling cannabis industry.
The council on May 11 voted unanimously in favor of a resolution directing county officials to add the tax increase proposal to the city’s general municipal election measures for the November ballot.
If passed by voters, the measure would increase taxes on retail cannabis businesses in Encinitas by a rate of between 4% and 7%% and raise taxes on non-retail establishments by 1% to 4%. Cannabis cultivation sites would be taxed at fees ranging from $2-$10 per square foot of canopy area.
The City Council would determine the exact taxation rate for dispensaries in these ranges if the proposal is approved by voters. City staff estimates the tax measure would generate between $800,000 and $1.4 million annually in gross revenue for Encinitas.
According to Councilman Tony Kranz, this revenue would go into the city’s general fund, but some of the funds are expected to be allocated specifically toward educating youth about cannabis use and code enforcement.
In 2020, Encinitas voters passed Measure H, which legalized the operation of a limited number of marijuana dispensaries within city limits and overturned a previous council ban on cannabis sales and operations.
The following year, the city hired HDL companies, an independent cannabis consulting firm, to assist in the development and review of the cannabis business registration and application process, as well as in the creation of a marijuana sales tax.
Marijuana license holders in California are already subject to a state cultivation tax of $161 per pound, as well as a 15% excise tax, not including additional taxes levied by city and county officials.
According to a staff report, consultants decided upon the suggested tax rate of between 4% and 7% based on similar taxes imposed by the cities of San Diego, Chula Vista, La Mesa, Oceanside and Vista, all in the 4%-7% range.
Councilman Tony Kranz said he supports the tax proposed by the ballot initiative because he believes that cannabis sales will result in additional costs to public services, mainly code enforcement and education, especially for youth when it comes to marijuana usage.
Kranz personally opposed Measure H but expressed that given voters’ passage of the law, the council was obligated to come up with a comprehensive tax and regulatory structure.
“Existing taxes on cannabis are state-controlled so we don’t see a lot of that revenue other than a small percentage that comes in for educational purposes,” Kranz said. “But the local impacts of [Measure H] will be significant, and a number of issues will come up because of these dispensaries, and it certainly seems appropriate that we raise the revenue coming in from cannabis to address those costs.
“I still think we’d be better off if Measure H hadn’t passed, but it did, so we’re going to have to deal with the impacts and there’s no question that there will be some impacts that could be really significant. We’re all dealing with that and I don’t have any choice but to get on board.”
Kranz talked about the long-term health implications of marijuana usage for young people, in particular, emphasizing the city’s key role in educating adolescents about the risks of cannabis consumption.
“While Prop 64 and Measure H make clear that this is an adult-use product, anybody who’s been a parent and a kid for that matter knows that the temptation and opportunity to consume cannabis is all around you,” Kranz said. “So there are certainly signs that when adolescents consume cannabis their brains are still in development and there are long term implications of that if they are cannabis users, so it’s important to make people aware of that, that this is not as benign as once thought. If you consume too much you can end up in a terrible situation and it’s not to be taken lightly.”
In public comments made during the council meeting, a majority of residents who spoke supported the tax measure.
Longtime resident Barbara Gordon said a city tax would help mitigate some of the harmful effects of the marijuana industry while providing important revenue for public services.
“These taxes are needed to address the real cost of marijuana businesses to the community,” Gordon said. “Drug driving, impaired driving, treatment programs, and the increased cost of hospitalization that we have all seen due to marijuana use. The tax can help mitigate the problems of youth addiction and the problems associated with drug addiction in general. It’s important to take into account the total cost that’s incurred so that taxpayers are not inadvertently subsidizing this industry.”
Mark Wilcox spoke in favor of an even higher tax rate on dispensaries, arguing more action was needed to mitigate the drug’s health effects on the public.
“These companies disguise their products as safe, fun and healthy, going so far as to represent to consumers that their products deliver wellbeing and relief to all those who seek it,” Wilcox said. “What they do not tell consumers is that their products carry the extreme risk of harm or even death.”
However, some residents spoke out against the ballot initiative, arguing the passage of such a tax would hurt already struggling business owners while also pushing added costs onto consumers and thus bolstering demand for the black market.
Rob Berkowitz is an attorney at Coast Law Group and helps represent Caliva, California’s largest vertically integrated cannabis company. Berkowitz said cannabis operations already struggle to compete with black market operations because of the burden imposed by existing state taxes, and called the 4% to 7% tax proposal “counterproductive” to the public interest.
“There’s a misconception among people in general that it’s easy to make money in this industry,” Berkowitz said. “In fact, it’s incredibly competitive and the margins are really thin, there’s lots of consolidation going on and a lot of businesses are going out of business and selling their interests. Even the big players are losing dramatic amounts of money right now and one of the reasons is because there’s still a thriving black market that makes it difficult for those regulated businesses.”
Since local dispensaries will inevitably pass along much of the burden from the new tax measure onto consumers, Berkowitz said that the proposal will almost certainly benefit black market sellers who do not face the same taxes and regulations as licensed operations.
Products on the illicit drug market are unregulated and less safe for use than their counterparts in the regulated market; black market profits from cannabis also tend to benefit criminal enterprises that are connected to other illicit activities as well, Berkowitz said.
“Pushing people into the black market is bad,” Berkowitz said. “Beyond dispute, the products in the regulated market are tested and dosage controlled so they tend to be safer than what you get on the black market. And then driving people to the black market also props up a cartel, so this [tax] ultimately drives all of the same activity that these regulations are intended to mitigate.
“In fact, this policy is contrary to promoting public safety because it’s propping up aspects of the cannabis industry that this state is looking to move away from.”
David Newman, who operated a cannabis nursery in Oceanside for more than 10 years under Senate Bill 420, agreed the proposed tax would invariably benefit black market sellers. He also argued that dispensaries are already overtaxed and overregulated in the status quo.
“The industry is in shambles right now, taxes are killing the industry,” Newman said. “Ultimately, it’s all passed down to the consumer and they’ll get upset so they’ll end up back at the black market where it’s less expensive … and less hassle for sellers. They’ve put in so much red tape already into the application process and the metric system involved that it’s a nightmare.”
Newman also heavily criticized the city’s proposal to impose a $2 to $10 cultivation tax per square foot of canopy area, arguing that such a proposal would essentially penalize cannabis producers in the instance of any kind of crop failure event.
“Why does this tax have to be so high? I mean a $2-$10 canopy tax per square foot is ridiculous, no one is doing that, it’s just a flawed process,” Newman said. “What if I have a crop failure if there’s disease or aphids or something else? I’m not getting a refund for that product, it’s just too high of a cost. $10 per square foot basically means you’re not going to make any money, and it makes no sense, I mean if you’re going to bleed us dry why are we even bothering with this business?”
Kranz said that he was unsurprised by this kind of opposition to the ballot measure but maintained that it was “unrealistic” for sellers to expect that there would be no additional tax measures imposed by the city given the passage of Measure H.
“It doesn’t surprise me that people who consume these products and sell these products are hopeful that there is no additional tax from the city but that’s a little unrealistic, this industry is very anti-taxation and unsurprisingly they think that there are already too many taxes in place,” said Kranz, while acknowledging that there was a point at which additional taxation measures could push buyers towards the black market.
“The reality is that we need to make sure that we’re not taxing legal cannabis to the point where people will be buying on the black market and that’s a real risk, so it’s my goal to make sure that we don’t cause that to happen.”
Councilmember Joy Lyndes supported the 4%-7% tax increase, which she said was in line with the recommendations of the experts hired by the city and also commensurate with the cannabis tax rates imposed by other jurisdictions.
“One important element of evaluating this is how other jurisdictions are treating this and responding to this issue, and that was one of the elements considered when these tax ranges were put forward for consideration and approval…the experts recommended this rate. The action was to adopt this resolution as the first step toward submission for the ballot in November,” Lyndes said.