Santa Clarita says pot costs probably outweigh revenue

Marijuana. Katharine Lotze/Signal

Santa Clarita officials didn’t formally project revenues that would have been brought in by pot sales, but everyone else told them the cost would outweigh any profit, city officials said Monday.

The city of Santa Clarita consulted reports from Colorado and Southern California for research before it prohibited commercial land uses associated with cannabis and regulating home cultivation at the April 10 City Council meeting.

Representatives from Denver County and and Colorado cities Fort Collins, Centennial and Aurora told Santa Clarita officials that the revenue generation from issuing cannabis business licenses was generally neutral, or offset by the cost associated with enforcement, said David Peterson, associate planner with the city’s Planning Division.  

Fort Collins, Aurora and Denver County all allow commercial land use associated with cannabis, while Centennial does not.

“We did not get precise numbers from other cities, but every city we talked to gave the same message,” Peterson said. “That (message is), when you consider the revenue generated by licensing, but then the legal costs for enforcement, it comes up as being revenue neutral.”

City staff also conducted reviews of other Southern California cities that prohibited commercial land use, such as Pasadena, Fillmore, Lancaster, Ventura, Santa Monica and Los Angeles County. The cities of Glendale and Palmdale were also consulted, but were conducting research on the matter and had taken no action.

The federal government’s recognizing of marijuana as a Schedule I drug by the Federal Controlled Substance Act made cannabis business activity less viable, according to a city staff report from Nov. 28.

The Denver County District Attorney’s office told the city that the Schedule I drug classification meant marijuana-related business cannot claim federal tax exemptions and pays between 40 percent and 60 percent federal tax.

“Marijuana has not been a significant revenue generator for the state or local jurisdictions when weighed against the costs associated with implementation and enforcement,” the office stated in the staff report.

Other findings of the Denver report pointed to an increase in marijuana-related vehicle fatalities by 145 percent between 2013 and 2016; the all-cash nature due to a lack of legitimate banking system; and legalization resulting in an increase in the homeless population. The Denver report failed to explain the link between homelessness and marijuana legalization. Cities that granted business licenses also noted their informal marijuana divisions created to oversee the program required significant staffing.

Los Angeles City Councilman Paul Krekorian wrote about projected revenues for the city of Los Angeles in a December 2016 motion for more research by the Office of Finance. Krekorian believed the city “would be entitled to upwards of $100 million in general fund revenue from gross receipts and sales tax within the first few years of the industry operating legally.”

However, cannabis’ Schedule I drug classification meant banks adhering to federal regulations might not formally bank with the industry, meaning “the lack of a legitimate banking system has the de facto effect of turning the vast majority of cannabis business activity into a cash-only business,” Krekorian stated. “This circumstance leads to the reality that the city’s Office of Finance will be faced with the prospects of (i) potential underpayment or evasion of taxes due to the city, or (ii) receipt of cash payments for tax obligations of cannabis businesses. The city must be prepared, as it begins the discussion of the 2017-18 city budget, for increasing demands in staffing and equipment for ensuring tax compliance by cannabis enterprises and for managing the potential of cash tax payments within the Office of Finance and as needed, with the Office of the Controller.”

The city of Los Angeles granted its first licenses for recreational cannabis sales Jan. 12, with WHTC in Studio City as the first recreational license recipient.

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