OC Cities Consider Cannabis Tax to Close Budget Gaps

August 15, 2020 Updated: August 17, 2020

Cities throughout Orange County, California, are considering allowing commercial cannabis sales to bring in tax revenue and help offset budget deficits brought on by the COVID-19 pandemic.

City councils in Costa Mesa, Anaheim, and Fullerton have been debating the issue in recent months. Costa Mesa, for example, projects a budget deficit of about $5 million to $10 million, and estimates $3 million in potential sales tax revenue from cannabis.

Santa Ana is the only city in Orange County currently allowing cannabis retail and related commercial businesses, including manufacturing and distribution.

Since Proposition 64 went into effect in 2018, legalizing the sale and use of recreational marijuana in California, it has been left up to each local government’s discretion to regulate activities surrounding cannabis retail.

Costa Mesa

The City of Costa Mesa will put a measure regarding cannabis regulation on November’s general election ballot.

In November 2016, the city passed Measure X, which permits marijuana manufacturing, testing, and distribution in a designated zone in the northeast of the city. Authorities have been working to shut down illegal dispensaries outside of that zone.

Opening it up citywide could simultaneously reduce enforcement expenses and generate revenue, say supporters of the new ballot measure.

At a July 21 City Council meeting, the council decided 6 to 1 to put the measure on the ballot. Council Member Allan Mansoor voted against it. One of his concerns was that unlicensed dispensaries have still popped up in Santa Ana even with legalizing shops there.

Council Member Sandra Genis voted in favor, but listed off concerns some residents have raised. Those include a potential increase in people driving under the influence of marijuana, effects the substance may have on teen brain development, and criticisms that Measure X didn’t bring the promised revenue windfall.

A number of studies, including a 2018 study published in the American Journal of Psychiatry, have suggested adolescent cannabis use can have lasting negative cognitive impacts. The expected $1.56 million in revenue from Measure X actually came in at about $160,000, the city’s assistant finance director, Jennifer King, told the Daily Pilot in January.

Mansoor and Genis were concerned about part of the proposal that mandated labor peace agreements in cannabis businesses with two or more employees. The agreements facilitate the unionization of workers.

State law mandates labor peace agreements for cannabis businesses with 20 or more employees. Genis asked if it was a typo, and it should have been 20, like the state mandate, instead of 2.

Mayor Katrina Foley said it wasn’t a typo. This was adopted into the proposal by suggestion of a United Food and Commercial Workers union representative who sits on the board of the Orange County Cannabis Chamber of Commerce.

“I probably won’t be voting for it,” Genis said of the ballot measure. “But I respect the people’s right to vote on it.”

During the public comment period, multiple cannabis business owners testified. Some called in from Santa Ana and said a large portion of their deliveries are to customers in Costa Mesa. That means Santa Ana is gaining the sales tax paid by Costa Mesa residents.

Epoch Times Photo
A sign for 420 Central hangs above the entryway to the cannabis shop in Santa Ana, Calif., on Aug. 14, 2020. (John Fredricks/The Epoch Times)
Epoch Times Photo
New Generation cannabis shop in Santa Ana, Calif., on Aug. 14, 2020. (John Fredricks/The Epoch Times)

Robert Taft, CEO of Santa Ana’s 420 Central, was one of the callers. He said for the past few months, he has had 300–500 customers monthly and paid approximately $55,000 monthly in taxes to Santa Ana.

Carol Molina, Costa Mesa’s finance director, told The Epoch Times that tourism is down significantly, which is losing the city hotel tax dollars and business conference revenues.

“So, obviously that $3 million [from taxing cannabis sales] would help close a little bit of that gap,” Molina said. The city’s total budget is $152.5 million.

Molina said Costa Mesa has received some federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funding, and is hoping to receive at least $1 million from the Federal Emergency Management Agency.

But FEMA funds “will only offset expenses that the city has incurred related to the emergency, so it will not offset revenue losses,” she said.

Anaheim

The Anaheim City Council shot down a cannabis ordinance in June—but revisited the discussion again in early July.

Mike Lyster, Anaheim’s chief communications officer, told The Epoch Times that “between 10 and 20 dispensaries” are already operating in the city illegally. Even when law enforcement shuts them down, another shop opens up, he said.

“So the discussion was, ‘Well, they’ve always been here. We expend a lot of resources to address it, so should we just create a regulatory system that allows a handful,’” Lyster said.

Taxing the cannabis businesses could bring in up to $5 million a year, Lyster said. “That’s on par with about a fairly well performing hotel in our city. It’s not overwhelming, but of course at this time—looking at any ways to get additional revenue—it is something that has been looked at,” he said.

The city initially projected a $75 million budget deficit for fiscal year 2020–2021 due to economic fallout from the COVID-19 pandemic. But the estimate has been reduced to $40 million to $50 million after the city received federal CARES Act funds, Lyster said.

Reimbursement for COVID-19 response expenditures from FEMA may further alter the deficit amount.

In June, the council considered a proposal for a three-step approval process that would regulate the cultivation, manufacturing, distribution, and taxing of cannabis to further close the budget gap. All three steps would have needed approval by the council for cannabis sales to move forward.

The council shot down the proposal 5 to 2. Mayor Harry Sidhu originally voted in favor, but changed his vote to “no,” leaving only two votes supporting the proposal. His son is a cannabis industry consultant, though the city determined Sidhu does not technically have a conflict of interest and is allowed to vote on the matter.

Two of the council members who opposed the proposal represent districts that share the Anaheim Canyon business area, where many of the shops would likely appear.

One is Republican council member Trevor O’Neil. He said at the June 9th meeting, “Let’s not turn the Anaheim Canyon into Cannabis Canyon.”

“I don’t think it’s a good thing for our community. I don’t think it’s a good thing for our neighborhoods. I don’t think it’s a good thing for our at-risk youth,” he said. “I certainly don’t think we stand to gain any significant revenue out of this. Instead, we’ll bring more problems that end up costing us more in the long run.”

He brought up the same concern as Genis and Mansoor in Costa Mesa: Anaheim was also looking to mandate labor peace agreements in cannabis businesses with two or more employees, instead of 20 like the state mandate.

O’Neil said this would likely mean all cannabis workers in the city would be unionized. He said this shouldn’t be decided by the city and called it unconstitutional.

Mayor Pro Tem Stephen Faessel is the other council member whose district encompasses part of the Canyon. He said his district already contains “every shelter bed” and now “I just don’t think it’s going to be fair to my residents … to house many of the cannabis shops.”

“I tried to keep my heart open to this,” Faessel said. He said he was touched by the story of a woman he spoke with who had worked for an illegal cannabis operation, then made the switch to a legal operation and saw dramatic improvements in her working conditions and life.

“[But] I’m still not comfortable with this item, and I will not support it,” he said.

The Anaheim Police Association issued a statement in May supporting the proposal, albeit reluctantly. The statement says the association was initially against Prop. 64, which opened the door to cannabis businesses statewide.

But a majority of Anaheim voters supported Prop. 64, and “we need to deal with the reality of the negative impacts of illegal cannabis shops and sales while foregoing the benefits of carefully regulated and controlled legal cannabis operations,” the statement said.

“This is a no-win situation for Anaheim residents and law enforcement. After considerable study and consultation with experts and stakeholders, the Anaheim Police Association … support[s] approval of the cannabis legalization ordinance.”

The council has not decided when to resuscitate the cannabis debate, but Lyster said he’s sure it will continue to be discussed in the future.

In the meantime, Lyster said, some of the city’s reopenings have helped pad the financial losses. Downtown Disney, located at the entrance of Disneyland, began phased reopenings on July 9—though the company’s signature theme park, originally scheduled to reopen July 17, remains closed.

Epoch Times Photo
The monorail passes an entrance gate to the Disneyland amusement park in Anaheim, Calif., on March 13, 2020. (Mario Tama/Getty Images)

“That’s encouraging for us; it’s a major sales-tax generator. But, of course, the parks, hotels, the convention center—those are our major drivers of revenue, hotel stay revenue, and also sales tax revenue,” Lyster said.

“Right now is when we typically would see folks from across the country and across the world visiting here. July and August are the months where we really see national and international visitors, whereas regional visitors tend to dominate the other parts of the year.”

Fullerton 

Fullerton is revising its cannabis ordinance, Title 15, which has prohibited the distribution, manufacturing, testing, delivery, and cultivation of marijuana since December 2017.

At a July 7 meeting, the Fullerton City Council voted 3 to 2 to review proposed cannabis businesses, conduct community outreach to Spanish-speaking residents, prepare maps to safeguard youths, and review possible municipal code amendments as a prelude to legalizing and taxing recreational marijuana sales.

Once the recommendations are completed, they will be passed along to the city’s planning commission for approval.

City manager Kenneth A. Domer told The Epoch Times the city is facing two challenges: long-term fiscal sustainability and the onslaught of COVID-19 expenditures.

“We’re a larger bedroom or residential community. For example, the City of Orange has the same amount of population and the same geographic size, but they bring in twice as much sales tax revenue in Orange than what we do here,” Domer said.

“So that’s the long-term issue. And we have a lot of road issues, infrastructure issues that we’re having—a lot of deferred maintenance.”

The city has a total budget of just over $240 million for the 2020–2021 fiscal year, with a general fund of $106 million.

Fullerton brings in most of its revenue through property and sales tax. Domer said the city lost 3 percent of its tax revenues due to the pandemic; it projects a $9 million deficit.

The city cut 153 part-time employees, and the executive leadership team took a 10 percent pay cut in an effort to reduce the gap. At the July 7 meeting, the city also decided to put a measure on the November ballot asking voters to approve a 1.25 percent city sales tax, expected to bring in some $25 million annually.

Domer doesn’t believe amending the cannabis ordinance will solve the city’s fiscal issues. “I don’t believe cannabis to be a revenue source for the city,” he said.

“If anything, it should cover the costs of regulating cannabis activities. It should cover code enforcement to go after illegal cannabis dispensaries that still operate, and pay for police costs. It should pay for, you know, public education and education efforts for … anti-drugs and all that stuff, and some other community benefit issues.”

Domer said the city wants to set the criteria for who can operate a dispensary. “We want legitimate business-minded people who comply with all the state codes and local codes. We don’t want those people who operate out of a … small shop in the back of an industrial center.”