PREPARED BY: MATT RODRIGUEZ AND DATE OF MEETING: 07/15/2024
BRIAN HICKEY
SUBJECT:
TITLE
CONSIDER ADOPTING RESOLUTION PLACING A MEASURE SEEKING TO IMPOSE A CANNABIS BUSINESS LICENSE TAX ON THE BALLOT FOR THE GENERAL MUNICIPAL ELECTION PREVIOUSLY CALLED FOR NOVEMBER 5, 2024
CEQA: This proposed action is not a project as defined by CEQA.
Label
CITY MANAGER RECOMMENDATION
Recommendation
Adopt Resolution
Body
Compliance statements
Placement of a proposed cannabis business license tax on the November 5, 2024 general election ballot for voters’ consideration supports the major policy goal of “Focus on Economic Development and Fiscal Diversification” contained in the City of San Pablo City Council Priority Work Plan FY 2023-25, effective May 1, 2023. This action is a continuation of Priority #410 - “Explore and Research Cannabis Commercial Uses and Impacts”. On December 13, 2023, the City Council further amended the City Council Priority Workplan and Major Policy Goal “Focus on Economic Development and Fiscal Diversification” to include the additional priority of “New Strategic Budget Initiatives to Address New Structural Deficits Forecasted for FY 2025-2027 Period” which further includes a specific initiative thereunder to “Identify New General Fund Annual Revenue Sources”.
RECOMMENDATION
Staff recommends that that the City Council adopt a resolution placing a measure on the ballot for the November 5, 2024 general election, seeking to impose a cannabis business license tax. The proposed measure is in the form of an Ordinance that, if enacted by more than 50% of the voters, will add Chapter 5.11 to Title 5 of the San Pablo Municipal Code, creating a tax on the privilege of conducting any cannabis business that may be authorized by the City of San Pablo in the future.
Since the proposed tax is a “general tax”, with revenues being available to the City for any legitimate government purpose, Government Code Section 53724 requires that the resolution be adopted by two-thirds (2/3rds) vote of the City Council (e.g. 4 affirmative votes).
BACKGROUND
State and Local Regulation of Cannabis
In 2016, California voters passed Proposition 64, known as the Adult Use of Marijuana Act (AUMA), legalizing the recreational use of cannabis in California for adults 21 and over. AUMA established a state-level regulatory framework for the cultivation, distribution, and sale of cannabis, while also imposing state taxes on such activities, including a 15% excise tax on retail sales. Notwithstanding statewide legalization under AUMA, California cities and counties continue to retain broad independent authority to permit, regulate, and tax cannabis businesses within their respective jurisdictions.
Though California cities are now required to allow limited indoor cultivation for personal use, and the delivery of cannabis to consumers from state-licensed cannabis delivery businesses, cities continue to maintain discretion over whether to further allow additional business activities such as commercial cultivation or retail sales within their respective jurisdictions. The City of San Pablo currently prohibits these additional commercial activities. To the extent the City Council may decide to allow additional cannabis uses in the future, it also retains the authority to regulate the location, operation, permitting, and licensing of such uses, as well as the authority to impose additional local taxes, with voter approval, for the privilege of engaging in such business activities.
Summary of Fiscal Analysis Research by HdL Consultants
In May 2023, the City retained HdL Consultants to develop a Fiscal Analysis on the Commercial Cannabis Industry for the City of San Pablo (See Attachment B). In the Fiscal Analysis, HDL indicated that setting future tax rates is equally important as setting a clear and unambiguous direction for future City policy on regulating this industry in San Pablo. As with any other industries, the cannabis industry desires regulatory certainty and proper permitting. Clear regulatory policies and competitive tax rates will be essential for both attracting and holding on to this industry sector, and for helping these businesses to outcompete the persistent illicit market in the East Bay region.
The following “Summary and Recommendations” from the HdL’s Fiscal Analysis concludes with the following:
1. The City’s best opportunity for developing tax revenue would come from cannabis retailers (both storefront and delivery-only), as there is both the greatest unmet consumer demand, and the greatest return in terms of revenue.
2. The City should set its tax rates for cannabis retailers to be competitive with the average of the other cities in the East Bay region as shown in Figure 6 on page 9 of Attachment B. Of the 7 nearby jurisdictions we sampled, five (5) impose a rate of 5.0%. This falls in the midpoint of HdL’s commonly recommended range, which runs from 4.0% up to 6.0%.
3. HdL recommends the tax rates for all other cannabis business activities be set within the ranges shown below in Figure 1 below. These recommended rates are generally lower than the rates in other nearby jurisdictions, as shown in Figure 6 on page 9 of Attachment B.
Overall, HdL indicates that that wholesale cannabis businesses must compete in a state-wide market, not just against local competitors. HdL’s recommended rates are designed to keep the cumulative state and local tax rate below 30% (See Appendix B in Attachment B; State Tax Considerations).
FIGURE 1:
4. While HdL recommends these tax rates to be competitive, the City should not anticipate any significant revenues from other (non-retail) cannabis businesses. While it is certainly possible that some such businesses may choose to locate in the City, the attractors for non-retail businesses are difficult to anticipate, making it very hard to provide revenue projections for future general fund budgeting purposes.
5. HdL projects that licensed, commercial cannabis retailers in the City of San Pablo could generate between $1.5 million and $2.2 million in annual cannabis tax revenue. These projections assume that retailers are well-located to attract consumers from the surrounding service area, stretching from Albany to the south and to the Carquinez Bridge to the north. NOTE: HdL provided general estimates for revenues that could potentially be generated from other non-retail cannabis businesses, but these are provided for informational purposes only and should not be considered revenue projections. Also, HdL did not anticipate any cannabis testing laboratories locating in the City as part of the Fiscal Analysis.
As of January 2023, data obtained from the State of California Department of Cannabis Cultivation shows that there are a total of 441 licensed cannabis businesses located in the East Bay Region in the cities of Oakland, El Cerrito, Richmond and County unincorporated area. Of these, there are 96 licenses for cultivation or nurseries, 88 distributors, 62 manufacturers, 142 retailers, 52 microbusiness (nearly all of which include retail sales) and 1 testing laboratory. The vast majority of these businesses are located in the City of Oakland, which has a total of 389 licensed cannabis businesses, of which 179 are retailers (including retailing microbusinesses). There are 27 licensed cannabis businesses in the surrounding City of Richmond and 1 cannabis retailer in the nearby County unincorporated area. (These licenses are shown below in Figure 4 in Attachment B).
This concentration of cannabis businesses demonstrates that the East Bay region and Oakland, CA in particular have a strong presence within California’s commercial cannabis industry, with a large and diverse industry cluster that can both support and provide competition for additional cannabis businesses.
Summary of Community Survey Conducted by SRI, Inc.
On February 5, 2024, the City Council was presented survey results from SRI, Inc. (SRI) who conducted the 2023 Annual Survey for the City during December 1, 2023 - January 4, 2024. Results indicated from the community at-large that 59.5% of those surveyed supported the sale of cannabis due to the City’s financial condition and the immediate need for additional revenue to the City’s General Fund. Additionally, a total of 75.5% of opinion leaders surveyed supported the sale of cannabis within the City (See Attachment C - 2023 SRI Annual Survey Results - Figure 7: Allow Sale of Cannabis).
During June - July 2024, SRI also conducted a local electorate survey of local voters in San Pablo regarding potential cannabis business license tax rates and ballot measure language for the November 5, 2024 general municipal election. Results from the local electorate survey process indicate that 57.5% to 60% of those surveyed support the sale of cannabis, and 55% to 61% support the proposed ballot measure imposing a cannabis business license tax in the City, with a 50% majority vote required to pass. Additionally, a total of 53% of opinion leaders surveyed support the sale of cannabis, and 54.5% of opinion leaders surveyed support the proposed cannabis business license tax (See Attachment D - SRI Electorate Survey Results on Allowing Sale of Cannabis (Fig. 2) and testing Ballot Language (Fig. 4B) (July 2024)
Based on the work conducted by HdL and SRI, Inc., City staff believes that there is overall demand and resident support for the City to allow up to three (3) establishments engaged in the retail sale of cannabis. While the ultimate decision of whether to permit retail sales of cannabis within the City of San Pablo is not being answered this evening, the purpose of this ballot measure is to establish a business license tax ahead of any future authorization by the City Council.
BALLOT MEASURE PROCESS
Ballot Language
The proposed resolution would place an enabling Ordinance on the November 5, 2024 ballot to enact a business license tax on any potential cannabis activities that the City Council may choose to authorize in the future. The question to be placed before the voters is:
“Shall the measure imposing a cannabis (“marijuana”) business license tax of up to 7% of gross receipts, or $10 per square foot of commercial grow area, lasting until voters end it, and estimated to generate $1,500,000 to $2,200,000 annually to provide City services such as police protection, recreational services, services to local youth and seniors, community grant programs, and for general government use, with all funds staying local and subject to audit, be adopted?”
Since the revenue may be used for all general municipal services, and is not restricted to any particular purposes, it is a general tax and will require the approval of a majority (more than 50%) of qualified electors casting votes.
Rates Under the Proposed Cannabis Business License Tax Ordinance
The following table provides a summary of the tax rates contained in the proposed
Ordinance. It is important to note that the rates cover a variety of potential cannabis activities, many of which the City Council is not considering at this time. The purpose of including these additional categories in the ballot measure and Ordinance is to eliminate the need to undertake an additional ballot initiative in the event the City Council is interested in authorizing any of these other uses in the future. All percentages in the table below are based on the cannabis business’s gross receipts:
|
Business Activity |
Maximum Tax Rate |
Initial Tax Rate |
|
Retail sales or delivery business |
7% |
5% |
|
Testing Laboratory |
2% |
2% |
|
Manufacturing, processing, or distribution |
6% |
4% |
|
Cultivation - Artificial Lighting |
$10.00 per square foot of canopy space |
$8.00 per square foot of canopy space |
|
Cultivation - Artificial and Natural Lighting |
$8.00 per square foot of canopy space |
$6.00 per square foot of canopy space |
|
Cultivation - No Artificial Lighting |
$4.00 per square foot of canopy space |
$4.00 per square foot of canopy space |
|
Cultivation - Nursery |
$2.00 per square foot of canopy space |
$2.00 per square foot of canopy space |
As discussed, the rates set forth above were established, in part, based upon HdL’s recommendations. Additionally, although the Ordinance sets initial tax rates, it has been purposely drafted to allow the City Council to adjust those rates in the future, based on market conditions. Accordingly, the rates may be adjusted by future resolution of the City Council, so long as they do not exceed the maximum rates allowed.
Ballot Measure Process and Calendar
The following chart sets forth key dates leading up to the November 5, 2024 Election as it pertains to the proposed cannabis business license tax:
|
July 15, 2024 |
City Council adopts resolution formally placing the measure on the November 5, 2024 ballot. |
|
August 9, 2024 |
Deadline to submit the ballot measure to the Contra Costa County Board of Supervisors. |
|
August 21, 2024 |
Primary arguments for/against the ballot measure must be filed with the Contra Costa County Elections Department through submission to the City Clerk. City Attorney to prepare and submit an impartial analysis of the ballot measure. |
|
November 5, 2024 |
Election Day: Ballot measure will require more than fifty percent (50%) of votes in favor to pass. |
FISCAL IMPACT
In the event the City Council ultimately permits up to three (3) retail cannabis establishments, imposition of a cannabis business license tax would be expected to generate between $1.5 million and $2.2 million in general fund revenues for the City of San Pablo as indicated by the following: (1) Hdl Fiscal Analysis on Commercial Cannabis Industry (Issued: May 3, 2023); and (2) previously presented 10-year Multi-Year Financial Forecast Model developed and presented to the City Council by PFM Financial Consultants on December 13, 2023, and accepted via Resolution 2023-167.
ATTACHMENTS
Att A - Resolution
Exhibit 1 - Proposed Ordinance Adding Chapter 5.11 to Municipal Code
Att B - HdL Fiscal Analysis on the Commercial Cannabis Industry (May 3, 2023)
Att C - 2023 SRI Annual Survey Results - Figure 7: Allow Sale of Cannabis
Att D - 2024 SRI Electorate Survey Results - Figures 2 and 4B: Commercial Retail Cannabis Tax