California Cities Want to Cash in on Marijuana

This election day, voters in two California cities, Brisbane in San Mateo County and Stanton in Orange County, will decide on new taxes on marijuana.

In Brisbane, Measure E would authorize a business license taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. of up to 6 percent of the gross receipts of marijuana businesses, depending on the nature of the business. Marijuana testing and distribution operations could be taxed at rates of up to 2 percent, manufacturing operations up to 4 percent, retail operations up to 5 percent, and other operations up to 6 percent. Annual revenue is expected to be approximately $300,000 once the market matures. The revenue will go to the city’s general fund.

Stanton voters will decide on Measure A, which authorizes the Stanton City Council to levy up to 6 percent in general taxes on gross receipts received by marijuana business and a maximum $12 per square foot tax on the space used for marijuana cultivation. The tax rate on gross receipts varies depending on the type of business. In Stanton, testing operations would be taxed at 2.5 percent, retail sales and delivery at 6 percent, distribution operations at 3 percent, and manufacturing at 4 percent.

Stanton currently has a ban on any marijuana business operation within the city, which Measure A does not affect. If the ban is lifted, the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. is projected to raise between $1 million and $1.4 million per year. The revenue would go to general city services.

The two local measures are part of a bigger conversation about legal marijuana in California. The state has struggled to expand the legal market since legal operations began in 2018. There are likely many reasons for the difficult beginnings, but the most often cited are high excise tax levels, lack of consumer access due to citywide bans (two-thirds of local governments have outlawed marijuana shops), and a well-established illegal market with little police enforcement.

On top of statewide issues with legal marijuana, both measures propose a gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. that violates the tax principles of neutrality, simplicity, and transparency. Voters should reject gross receipts taxes, because they result in tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. by applying taxes to the same economic value multiple times. Instead, any local taxes should be traditional excise taxes, imposed only once for each purchase.

Voters and lawmakers should also be aware of the trade-offs associated with marijuana regulation and taxation. Some want high tax rates to generate high revenue; others want low tax rates to move economic activity out of the black market and into the legal stores. As the experience in California has proven, it can be very difficult to do both.

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