Early on New Year’s Day, Mayor Jesse Arreguín snipped a green ribbon to officially begin the legal sale of cannabis in Berkeley. From left, State Senator Nancy Skinner, Sean Luse, COO of Berkeley Patients Group, Arreguín, Tim Schick, executive director of BPG, and Sabrina Fendrik, the director of government affairs for BPG. Photo: Pete Rosos
Early on New Year’s Day, Mayor Jesse Arreguín snipped a green ribbon to officially begin the legal sale of cannabis in Berkeley. From left, State Senator Nancy Skinner, Sean Luse, COO of Berkeley Patients Group, Arreguín, Tim Schick, executive director of BPG, and Sabrina Fendrik, the director of government affairs for BPG. Photo: Pete Rosos

Less than two months after celebrating the first legal recreational marijuana sales in Berkeley, the City Council on Tuesday voted to cut the business license tax for non-medical cannabis businesses in the city by half, to 5%. The new rate will be effective 30 days after the second reading of the ordinance, which is scheduled for Feb. 27.

Mayor Jesse Arreguín proposed the cut to make Berkeley “more competitive in the regional market” for recreational marijuana businesses. Berkeley’s 10% rate had been established by Measure S in 2010. The debate over the cut focused on whether the council had sufficient information to make the decision so soon after the start of the recreational cannabis business.

“Berkeley could become a mecca” if it lowered the tax, said Elvis McGovern from Weird Science Labs during the public comment period. “I’ve spoken to $100 million in business that say they would move to Berkeley if the tax was reasonable. The 10% tax is not reasonable for businesses.”

Much of the debate both in public comment and among council members focused on competition between legal dispensaries and illegal dealers.

“(Our business) has to compete with the black market, and right now, the black market is killing it,” said Sabrina Fendrick, director of government relations at Berkeley Patients Group. “When you have high taxes and you have all these illegal operators, customers are going to go to illegal operators.”

(Comments about the “black market” provoked a reprimand from Councilman Kriss Worthington, who said that speakers should refer to it as the “illegal” or” shadow” market. Later in the debate, Councilman Ben Bartlett made a point of referring to the “white” market.)

“We’re just trying to make it like any other small business,” said Misha Yerlick from Atlas Edibles. “High taxes are based on the false idea that Berkeley lives in a bubble. Delivery services in San Francisco and dozens of other cities will happily take the business.”

Many of the speakers from cannabis businesses argued for a further reduction, to 2.5%, which is the rate at which medical cannabis businesses are taxed.

“I was flabbergasted that after six weeks the council is planning to lower the tax by 50%, and now we’re hearing 75%, without any analysis,” said John Caner, CEO, Downtown Berkeley Association, who was speaking in a personal capacity. “We desperately need the revenues.”

“Cannabis is still an intoxicating product, it’s still an addicting product,” said Holly Scheider. “While many people use it responsibly, others won’t. You need a source of revenue to fund remediation. You don’t know what is going to happen. It’s still new. Don’t give up the one source of revenue you have.”

When debate among council members started, the argument for further analysis was forcefully made.

“I think it’s too soon for us to take action on this. We need more information,” said Councilwoman Susan Wengraf. “Businesses are very new. Some of them haven’t even opened yet. I’m also very interested to know what other cities are going to do. We need a regional approach where all of the cities in the area need to be at the same rate.”

Wengraf suggested establishing an ad-hoc subcommittee of the city council to analyze the data.

“It’s easier to lower taxes than to raise them. Once you’ve lowered a tax, you’re pretty much locking in that reduction,” said Councilwoman Sophie Hahn. “We don’t have enough information, and this is way too soon to be making a change. What is the expected volume of sales in Berkeley? What are the expected prices?”

Hahn also raised the issue of illegal sales to people under 21.

“We have 100% youth access to marijuana, and there will never be a legitimate market because they’re not over 21,” she said. “When the legal price goes down, the illegal price also goes down.”

Hahn said money needed to be allocated to education for Berkeley’s youth.

Worthington said that the 10% rate established by Measure S had unintended consequences. The tax could be applied to cultivators, manufacturers, testers and retailers, resulting in an effective local tax rate of 40%.

“What we have today isn’t what the voters voted for. I think it makes sense for us to make an adjustment,” he said. “The most important thing to think about is how do we maximize getting the illegal behaviors to come into a regulated and taxed system. A 40% tax rate is not going to bring much illegal activity into a licensed, safe environment.”

Worthington elicited applause from the public when he suggested the tax rate be set at 4.20%, alluding to the widely observed marijuana legalization “holiday” on April 20 each year.

“I don’t want to drive businesses, particularly small businesses, to neighboring cities,” said Councilwoman Lori Droste. “But I also don’t want to create a mecca here.”

Droste emphasized the importance of a regional solution, to avoid a race to the bottom of competing low tax rates.

Councilwoman Linda Maio questioned why testing businesses – required by law in Berkeley – should be taxed at a high rate.

“That doesn’t make any sense because we want people to test,” she said.

Maio was also concerned about delaying businesses if the council decided to do more analysis.

“I worry about how long it’s going to take to get good data,” she said. “The field is moving very rapidly.”

“If you tax something so high that businesses go away, then you get no revenue,” said Arreguín. “I’m putting 5% out there for discussion, but I do think that 10% is way too much.”

Mayor Arreguín said that he has spoken to the mayor of Emeryville, who was also interested in a 5% rate. He had also spoken to some Oakland city council members, who were also thinking about 5% (Oakland’s current rate is 10%).

City staff did not prepare a report on the implications of reducing the tax, and the lack of analysis about the impact of the cut worried some council members.

“All of a sudden, when it has to do with this particular issue, we are willing to make a change to the voter-approved tax rate on literally half a page of information,” said Hahn. “For me, this is not about one number or another. This is about making a decision by the seat of our pants, based on nothing. There’s lots of data out there and we haven’t looked at it.

“The problem I have is that I do not have, and I do not believe anyone on this council has, adequate information to make this decision,” she said.

Hahn’s point faced strong pushback from Councilwoman Cheryl Davila, who said it was “kind of insulting” to suggest that council members hadn’t studied the data. “Just check yourself on that one,” she said to Hahn.

Worthington also said he felt he was fully informed.

“I don’t want anyone listening to think that city council members are voting not based on researching the facts,” he said. “I have exhaustively researched the facts.”

“The 10% rate was set in 2010 without any data,” said Councilwoman Kate Harrison. “So the question is where do we start? The mayor’s approach makes sense. It’s a moderate, middle ground.”

A vote on Wengraf’s proposal to establish a subcommittee for further study failed, supported only by Wengraf, Hahn and Councilwoman Droste.

During Tuesday’s council meeting, with a decision to lower the rate to 5% looking certain, Droste said she was most concerned about the governing process. She argued for engaging neighboring jurisdictions and leaving the option to raise the local tax rate if the state excise tax (currently 15%) was lowered. Consultation with neighboring jurisdictions was agreed, but the mayor would not accept including a possible rise depending on state action in his motion.

The reduction of the business tax to 5% passed with abstentions from Hahn and Wengraf.

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Lance Knobel (Berkeleyside co-founder) has been a journalist for nearly 40 years. Much of his career was in business journalism. He was editor-in-chief of both Management Today, the leading business magazine...