Cannabis is a threat to the city, but not in the way you think
Cannabis has been the city of Sacramento’s new-found pot of gold.
With the most permissive regulatory environment in the region for cultivating, distributing and selling cannabis, the existing 4% tax on the industry now dwarfs all revenue from all parking lots city-wide.
Cannabis businesses are expected to generate about $550 million in revenue this fiscal year — more than $1,000 worth of pot activity for every man, woman and child who lives in the city. The industry’s estimated work force of 10,000, meanwhile, now rivals that of local employees of the federal government.
But now Sacramento finds itself with a cannabis quandary. Tax revenues peaked two years ago and are on the slight decline. A local industry showing signs of instability wants tax relief. A city staff staring at a structural budget deficit says no, as do youth organizations that are slated to receive 40% of the tax money.
A divided city council is calling for a task force.
“We’re not on the same page,” Councilman Rick Jennings said at a recent committee meeting on the topic. “We need to come together and figure out what is really going on in the industry.”
Economists from the noted RAND Corporation think tank warned Californians more than a decade ago that if they legalized marijuana, something dramatic would happen: Its price would go way down, “likely by more than 80%.” Meanwhile, “the price the consumers face will depend heavily on taxes, the structure of the regulatory regime and how taxes and regulations are enforced.”
That appears to be exactly what is now happening.
What’s more, the city and its voters have decided to count on the cannabis industry to help fund local youth programs. The city’s permitting structure places no limits on the number of cultivation, testing and distribution businesses, but it does place a limit of 40 dispensaries (there are now 34). Meanwhile, next door, in unincorporated Sacramento County, an anti-cannabis Board of Supervisors prohibits dispensaries.
When California voters legalized the recreational use of marijuana with Proposition 64 in 2016, it gave local governments discretion on how to regulate the industry. Sacramento opted to fully embrace it, so long as permitted businesses paid 4% of revenues as tax. Soon, the money began to flow in. The first year, 2016-17, saw $4.8 million in new money for the city. Then $6.9 million. Then $11.5 million. Then $14.9 million. And then, in the 2020-21 fiscal year, a record $25,396,666.
Since then, things have slowly began to go to pot.
Taxes dipped to $22.7 million in the fiscal year that ended in June. This fiscal year, the city is budgeting for $22 million. (Parking revenues, meanwhile, are estimated at $16.4 million.)
In Sacramento, as the cannabis industry wanes, the city has less money to keep teens active in positive programs. That’s because city voters decided to tie cannabis tax revenues to the Sacramento Children’s Fund, passing Measure L in 2022. The measure directs 40% of the cannabis business operations tax to the fund. A commission has been established to distribute these proceeds and is now in the process of identifying the winning organizations and programs. The city has set aside $9 million of cannabis tax in this year’s budget that will be available for disbursement next year.
Councilwoman Katie Valenzuela is on the side of lowering the tax in the name of preserving some money for the Children’s Fund, according to her assessment of the shaky state of the industry.
“Like it or not, Measure L tied the success of the Children’s Fund to the success of the cannabis industry,” she said. “If there’s no cannabis revenue, there is no Children’s Fund.”
Valenzuela is in the camp of looking for alternate sources of money for the fund while eliminating the local tax on cannabis cultivation and distribution and lowering the dispensary tax to 2% of sales. That, according to the city, would reduce revenues by $14 million.
“Not acting might also reduce the revenue if not the same amount, or more,” Valenzuela said. “All the indicators are there.”
Councilwoman Lisa Kaplan said she was open to a local tax on alcohol that’s the same as the cannabis tax “because alcohol has been shown to have more damage for our youth.”
Councilman Eric Guerra, meanwhile, opposes any current changes to the cannabis tax. “I think that would be a very hasty move,” he said at a Nov. 28 meeting.
With no consensus, Councilman Jennings called for a task force of industry and city representatives and other interested parties. It is scheduled to report back to the council’s Law and Legislation Committee sometime next year.
Sacramento’s downward trajectory in cannabis activity in recent years fits a statewide trend in revenues. One reason could be that the commodity price is dropping. Back in 2010, for example, the illicit market price of an ounce of cannabis was somewhere between $300 to $400 an ounce, according to the RAND Institute’s best estimates. Now, it’s down as much as 42% after adjusting for inflation, based on one recent market survey.
Basic economics means that downward pressure on prices will make any costs, such as taxes, even more important.
In 2009, Dale Sky Jones, president of the world’s first cannabis college, pushed for the first cannabis tax in California, a 1.8% levy on gross receipts of medicinal marijuana sales that was approved by voters in Oakland. Now, she worries about taxing this young industry too aggressively.
“If we over-tax it, all we are doing is ensuring a vibrant illegal market that is run by violent drug cartels who are trafficking other drugs,” she said. “This is being bought and sold. The question is by whom.”
It’s no wonder that Oregon has the most dispensaries per capita and the lowest retail price, according to one national survey.
Meanwhile, the highest price of cannabis is in our nation’s capital, according to the same survey. It has no dispensaries for recreational use and only seven for patients with prescriptions from physicians.
Californians unleashed some powerful market forces when they decided to legalize marijuana in 2016. Sacramento has decided to be a major player in the industry with a comparatively open permitting structure. As the city’s staff report points out, Sacramento is perfectly positioned to be a capital in the industry statewide given its central location, access to interstates and other positives such as low electricity prices (the city ordinance requires all cultivation to occur indoors).
When voters in 2022 decided to merge the finances of cannabis and youth programs in Sacramento, they created one weird marriage. Will it work?
There is a recent ray of hope: So far this fiscal year, cannabis tax revenues are trending slightly upward, up 4% so far. Sacramento’s unique pot of gold does not appear in immediate danger. Yet this industry is so young and volatile.
Beware of predicting where it — or the Sacramento City Council — will go.
