'Counterproductive, Incoherent and Unenforceable': Why L.A.'s Measure CB, Which Aims to Tax Unlicensed Pot Shops, Is Actually a Very Bad Idea
The proposition on the June 2 ballot, may sound like an effort to level the playing field. But an industry analyst and two legal license holders say it will do exactly the opposite.
I spent part of my Memorial Day weekend going over the eight-page ballot for the upcoming June 2 statewide election (three of those pages were just candidates for governor but still) and found myself stymied by a proposal I realize I should have had a handle on: Measure CB, which proposes taxing unlicensed cannabis businesses in the city of Los Angeles. The language of the proposition sure sounds compelling. Here it is in its entirety:
APPLYING CANNABIS BUSINESS TAXES TO UNLICENSED CANNABIS BUSINESSES.
Shall an ordinance be adopted to apply the City’s existing cannabis business taxes to unlicensed cannabis businesses at current rates (10% on cannabis sales; 5% on medical cannabis sales; 2% on manufacturing, cultivation or other commercialization; 1 % on transportation, testing or research); generating approximately $30-35 million annually for general City services, such as street/sidewalk repairs, 911 emergency response, fire protection, and parks, until ended by voters?
I mean, who wouldn’t want a cool extra $35 million a year for sidewalk repair and parks, am I right? And then there’s the whole leveling-the-playing-field argument, which appealed to my sense of fair play.
I had it all figured out — or thought I did until I started texting with my favorite cookbook author and cannabis confiseuse Vanessa Lavorato who had a decidedly different take on it than I did. Since Vanessa is no slouch in the pot policy department herself, this made me realize I needed to seek guidance from folks who know more about this than either of us do. My first call was to cannabis consulting firm Ananda Strategy’s Hirsh Jain who lives and breathes this stuff for a living. And he had … some thoughts.
“It’s counterproductive, incoherent and unenforceable”
“I would sum up Measure CB as counterproductive, incoherent and unenforceable,” Jain said. “It’s counterproductive because what it risks doing is normalizing and legitimizing the illicit market rather than shrinking it,” He explained. When you create a formal tax framework for illegal operators, the city is implicitly signaling that unlicensed cannabis businesses are permanent participants in the marketplace instead of illegal businesses that should ultimately transition into the regulated system.
“I’ll also say that the proposal may unintentionally discourage the transition into the legal market, because if illicit operators are allowed to continue operating with lower compliance costs by merely paying some form of taxes, then there isn’t really an economic incentive to become fully licensed.”
“It’s also incoherent. If this measure passes, it will create like some pretty meaningful legal and administrative contradictions from the city’s perspective; they would essentially be attempting to tax businesses that remain unlawful under state and local laws, and that creates an inherent tension from the city’s perspective between their goals of revenue collection and their existing ongoing enforcement obligations. So the city’s going to be in this really awkward — but more than awkward, incoherent —position of literally taxing operators at the same time they’re trying to shut them down.”
“And finally,” Jain said, “I think it’s going to prove very difficult to enforce because most illicit operators already evade existing cannabis taxes and regulations. Do we have any reason to believe that businesses operating outside the law and flouting the law would suddenly begin accurately reporting their revenues or voluntarily complying with this new tax regime?”
Jain says that instead of achieving the hoped-for parity and fairness between licensed and unlicensed cannabis businesses, what Measure CB would do is “basically create a two-tiered system that still disadvantages the compliant businesses. … I think what’s being lost here is that this measure does does nothing to address the actual structural drivers of the illicit market, why the illicit market exists. What are the core problems in L.A.? Excessive taxation, high compliance costs and slow permitting. When you tax illegal shops without fixing the underlying structural issues that gave rise to the illegal shops in the first place, that suggests that this is a symbolic measure rather than a meaningful market solution.”
“Nothing that quick is ever done right in the city”
Jain isn’t the only one with concerns. “I do feel it’s a little misleading for the way it’s been written and presented,” says Luis Rivera, founder of the non-profit Social Equity LA and owner of a social equity delivery license. “I mean, who doesn’t want to tax illegal shops? However, it undermines Prop 64, which the voters approved to have a legal cannabis industry. Now you’re allowing this whole wave of people to come in and there’s no parity in terms of what we have had to go through to get our licenses and be able to operate, and where they’re starting from.”
His biggest concern, he says, is that the ramifications of the measure haven’t fully been thought through. “This went from being presented to the City Council to the CAO’s office to being ratified by the mayor in less than a month. Nothing that quick is ever done right in the city, so we do feel there are a lot of gaps and there are a lot better ways to have addressed the illegal market. This is kind of a budget-gap-filler and we don’t feel that it will play out in practice.”
For one example of that, dispensary owner and Social Equity L.A.’s policy director Chris Martinez points to how, exactly, these taxes are to be collected. “They have to self-report,” he says. “and they’ve made a career about not reporting anything. So, what type of resources is the city going to use to identify these operators, and what type of resources is the city going to have to use to go after these guys that don’t pay their taxes?”
And, like Jain, Rivera and Martinez feel that the measure does a disservice to the struggling dispensaries that have spent a lot of time, energy and money to comply with the law. “A lot of legal license operators who’ve jumped through all the loops to get operational are still struggling and have gotten behind on their taxes,’ says Martinez. “Now they have a huge tax liability, and they’re required to either move forward with a payment plan or risk losing their license. Meanwhile, these unlicensed shops are essentially getting the OK. It’s like ‘Hey, whatever back taxes you haven’t paid, we’re not going to pay attention to that. We’ll allow you guys to move forward as long as you pay these taxes moving forward.”
“It will shut doors”
I asked Rivera and Martinez what they thought the impact would be if Measure CB passes.
“It will shut doors,” Rivera said emphatically. “I would say that 90% of the people I know that are social equity [license holders] that went through this process have shut their doors already. This will [really impact] that last 10%. It’s already too hard to compete with an illegal market because of the overhead, the overregulation, and the 35 to 40% in taxes. … For those of us who are already struggling to have more competition, and for [that competition] to have lower startup costs and operational expenses, there’s just no way to compete.”
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