Photo by Kevin Hume

Taxes Want to Get High, with Prop. D

Tuesday’s election includes a cannabis tax that purports to help medical patients and Drug War victims. We checked whether these claims are half-baked.

San Francisco voters have always been very kind to marijuana. Nearly 75 percent of us voted in favor of 2016’s Proposition 64, which legalized recreational cannabis. The original medical-marijuana measure, 1996’s Proposition 215, passed here by nearly the same landslide margin.

But next week’s election will test a different side of San Francisco’s tolerance to legal pot: our propensity for tacking more taxes onto local cannabis sales.

The new pot tax was originally proposed by the late Mayor Ed Lee back in 2017, before recreational weed was even legalized. The version you’ll see on this Tuesday’s ballot is Proposition D, the “Additional Tax on Cannabis Businesses” introduced by District 10 Sup. Malia Cohen.

“San Francisco is the last major city in California to pass a [local] cannabis tax,” Cohen tells SF Evergreen. “We’ve crafted the lowest, most progressive tax of its kind in the entire state.

“This is to begin to establish an infrastructure for a tax to be collected on cannabis-related businesses, because we do not currently have it,” she adds. “The legal cannabis industry is brand-new. They are still learning to operate in the legal market. I believe this infrastructure actually helps them get there.”

If passed, the measure would bring in a projected $7 to $16 million each year that supporters say would subsidize compassion programs for cancer and HIV patients, establish union-hiring practices, and fund equity entrepreneurs from communities historically persecuted by the War on Drugs.

Critics point out there is no guarantee the money would actually be used on these things. The full text of the measure confirms that “Revenues from this additional tax would go into the General Fund, which The City may use for any public purpose.”

Green Cross dispensary founder and president Kevin Reed has been vocal in his opposition. “The ballot argument is disingenuous at best,” he tells SF Evergreen. “If the city really wants compassion programs for low-income patients, then we should reject Prop. D so that businesses will be better able to afford to give away free medicine to patients in need.”

You may be confused, considering you already pay more than 20 percent in state and excise taxes on your marijuana purchases. But Prop. D is not a tax on the weed you buy. Instead, it’s a gross-receipts tax on San Francisco cannabis businesses that do more than half a million dollars in business annually.

“The heaviest tax burden should fall on the highest-earning businesses,” Cohen says. “We’re always saying, ‘Tax the Rich.’ ”

Reed points out that very few of these bud businesses are actually rich, because of already-high taxes and the steep costs of regulatory compliance.

“In a world where a cannabis company pays regular taxes, a new tax could be fine,” he says. “But here in California, cannabis businesses are already subject to 10-percent cultivation taxes, 15-percent excise taxes, 9-percent sales taxes, not to mention exorbitant testing fees.

“Worse, since U.S. law still prohibits cannabis businesses from taking standard business deductions on federal taxes, cannabis businesses are taxed on expenses like rent and payroll that all other businesses deduct — raising cannabis businesses’ effective tax rate to as much as 90 percent,” he says. “Every little bit hurts, and this high local tax hurts more.”

It is true, though, that this tax would not apply to most San Francisco cannabis businesses. The Prop. D tax would only kick in once a company hits $500,000 in annual sales.

The San Francisco Office of the Controller estimates that about half of San Francisco pot companies do not even make a million dollars a year, let alone the $500,000 that would set off this cannabis tax.

And those small shops only account for about 3 percent of all marijuana sales in the city, according to the Controller’s data. Meanwhile, well-funded franchise dispensary chains and nationally known delivery services — which make up only 14 percent of the city’s marijuana industry — have hogged up more than 63 percent of San Francisco cannabis sales. Prop. D seeks to level a playing field being dominated by out-of-town ownership.

“This is not a haphazard half-measure, it’s actually data-driven,” Cohen tells us.

The tax doesn’t just apply to dispensaries, but also to delivery services, growers, and cannabis oil extractors. Prop. D would tax these industry sectors at varying rates.

“Cultivators and manufacturers, they’re only going to be paying a 1.5-percent tax,” she says. (In actuality, some businesses would be taxed at a rate of 5 percent.) “Cultivators and manufacturers don’t have the flexibility to add mark-up to their products. Retailers have the ability to add a little mark-up. The tax percentage accounts for that.”

But the tax’s opponents argue this only serves to penalize companies that already pay a fantastically larger tax burden than similar businesses that do not deal in weed.

“This hurts cannabis consumers, and hurts low-income cannabis consumers most,” says the Green Cross’ Reed. He notes the example of an edible being taxed 1.5 percent on every step of the supply chain from grower to manufacturer to distributor, then hit with another 5 percent with this new tax.

“The edible has been marked up 9.5 percent, and most of these companies will pass on the majority of this cost to customers,” Reed explains. “Customers who are already struggling to afford cannabis, especially people with highly unpredictable medical bills who need cannabis for their health, will be least able to pay this tax mark-up.”

San Francisco officials clearly regret that they missed a chance to slap these taxes on before the big legal weed celebrations of last Jan. 1, when giddy stoners would have happily paid any tax rate presented to them. Now the city is trying to get in line with other cities’ local cannabis tax rates, like Berkeley (5 percent), and Santa Cruz (8 percent).

But Oakland will vote Tuesday on whether to cut its local marijuana taxes, fearing that its rates have driven too many people back to the black market. City governments are basically struggling with the same issue plaguing the pot industry. They know there’s a green rush of cannabis sales, but they don’t see enough green rushing into their bank accounts.