In response to numerous calls by cannabis entrepreneurs, the Long Beach City Council recently voted to move forward with the study of different options for a two-year pilot program to incentivize the development of non-retail cannabis businesses in the city. These businesses include manufacturers and distributors of cannabis products, as well as labs contracted to perform state-mandated product testing to ensure cannabis and cannabis byproducts sold to consumers meet state health standards.
The pilot program was proposed by 9th District Councilmember Rex Richardson. Currently, the majority of cannabis tax revenue in the city is collected from 32 licensed retailers, with only one-third of revenues stemming from any of the other four industry sectors: cultivation, manufacturing, distribution and testing labs.
The State of California as well as many localities that offer licenses for medical and recreational cannabis have seen revenues fall below expectations in the first year of licensing. In Long Beach, cannabis tax revenues in 2018 were so low that they failed to cover the city’s costs for licensing, enforcement and other municipal costs associated with the industry, according to Cannabis Program Manager Ajay Kolluri.
In total, the city has issued 44 medical and 34 adult-use or recreational licenses so far. Many of these licenses are co-located, meaning that two licenses are held by the same business for the cultivation, sale, manufacturing, distribution or testing of medical and adult-use cannabis products. In 2018, these businesses paid $1.6 million in taxes and fees, with $626,000 collected from retail businesses, commonly referred to as dispensaries, and $517,000 collected from cultivation businesses. The majority of the remaining revenues came from fees and penalties as well as some taxes paid by testing labs.
Sixteen licenses of each category, medical and adult-use, are held by dispensaries. According to the latest data made available by the city, seven cultivation licenses have been issued in Long Beach, five for medical and two for adult-use cannabis. A total of 39 licenses have been issued for manufacturing, distribution and testing, with 23 issued for medical cannabis and 16 for adult-use. A total of 536 licenses are still in various stages of the application process.
The city’s projections for potential tax revenues from cannabis businesses rely on the expectation that businesses whose licenses have been issued, or are expected to complete the licensing process soon, enter the market right away. However, many in the local cannabis industry say high taxes on the state and local level are preventing prospective businesses from opening and are causing existing businesses to shut down.
“I get asked quite often why there aren’t more manufacturers open and running,” Stacy Loucks, owner of the Long Beach-based manufacturing company TKO Edibles, told the city council during a July 2 hearing to discuss the proposed pilot program. “The expenses of licensing, buildout, equipment purchases, legal and compliance issues are certainly the first hurdle, but not the last,” Loucks told the council, noting taxes as another burden challenging the industry’s profitability. “Many people have simply run out of money and cannot operate with a five-figure loss every month,” she noted.
In response to Richardson’s request, city staff proposed three possible steps to incentivize and support the development of a diverse cannabis industry in the city: changes to the city’s cannabis building design and zoning requirements, lower tax rates for non-retail businesses and regulations allowing the shared use of manufacturing spaces. The proposed changes, the report argued, would ease the comparably high tax burden placed on non-retail businesses in Long Beach. Further, the report suggested, they would also take pressure off of a cannabis real estate market that has seen intense increases in rental costs due to zoning limitations and allow manufacturing businesses to reduce their overhead costs.
City staff, as well as members of the cannabis industry, cautioned the city council of the limitations presented by the two-year pilot program format. “Businesses tend to avoid uncertainty when making investment decisions,” the staff report stated. “The shorter the pilot, the less likely a business will respond to a policy by increasing investment. Therefore, a pilot program may not fully capture the effect that a permanent program would have on commercial cannabis activity in Long Beach.”
On July 2, the city council voted unanimously to move forward with the study of these options, including a significant decrease in tax rates for non-retail businesses from 6% to 3% and lower, depending on the nature of the business. Second District Councilmember Jeannine Pearce recused herself due to her role as a consultant in the cannabis industry and Councilmember Daryl Supernaw was absent at the time of the vote.
“This issue has been raised over the past few months,” Richardson summarized. “The idea here is that this is a big issue. It’s not something we can simply place on the agenda and move forward; we’re going to need a number of levels of review.” At this point, the city has not yet released a timeline for the study of the different elements of the proposed pilot program.