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Growing Pains Part 2: Back to the Underground

Instead of welcoming the cannabis industry into the light, Oakland's new rules are putting many out of business, while others are disappearing into the illicit market.

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Left out or diving underground are small- and mid-size companies that don't qualify as equity applicants and lack the ability to "pay to play."



Cannabis tax attorney
James Anthony has come up with an acronym to label the winners under Oakland's regulatory framework. Large firms and investors who have the ability to incubate multiple equity applicants are BETIs (pronounced "bettys") because they're Big Enough To Incubate.

"BETI means you're rich," said Anthony. "Equity means you're poor. But what about all those smaller businesses, the too small to incubate? Oakland is being polarized between large businesses with money and real estate, and the poor businesses, but there's no middle class."

He said that while he supports the cannabis industry in doing "its part" to address racism and the drug war, he thinks Oakland has made significant policy mistakes by not creating a system that can usher already-existing businesses into the legitimate economy.

"If the expectation of the city council or city staff is that 500 years of racism in the United States is going to be remedied by legalizing pot in Oakland in 18 months, I think that's an ambition that's a setup for disappointment," he said.

But the policy fight around what form the equity program will take has been decided, and so Anthony's biggest concern right now is taxes. He sees companies struggling to stay in business because state and local taxes compound across the supply chain, adding as much as 40 percent to the cost of cannabis products in the regulated market. The state and city are to blame.

Prop. 64 created two new statewide cannabis taxes. Growers have to pay $9.25 per pound of dried flowers, the most common raw product from the plant. Leaves, or "shake," and fresh wet plants are taxed at lower rates. Then for every retail sale of a cannabis product, the state imposes a 15-percent tax.

That would already be an incredibly high tax rate, but on top of this, the city of Oakland taxes medical marijuana sales at 5 percent and recreational cannabis sales at 10 percent. Then Oakland imposes a gross receipts tax on every stage in the cannabis industry's cycle, between 5 and 10 percent depending on whether the goods are intended for medical or adult-use. Growers pay. Manufacturers pay. Delivery services pay. Testing companies pay. The result is that companies can pay twice as much in taxes in Oakland as they would in Richmond, for example, and many times more than if they located in Berkeley or Santa Rosa or other more cannabis-friendly jurisdictions.

The short-term consequence, according to Anthony, is that a lot of patients seeking medical cannabis have already fled the above-ground market and are now buying nugs and edibles and hash and oils in the underground one.

"You have patient demand that's gone underground because it's more price sensitive and the combination of state local taxes is devastating," said Anthony. Medical patients are more concerned about prices because they generally buy larger quantities. "At the same time, you have these people in Oakland who were a ready-made underground supply, but they're being pushed out of the regulated market. They're like, 'dispensaries won't buy my stuff anymore, gee, do you think it's possible to sell marijuana underground? We've got 40 years-experience of doing it.'"

One cannabis patient, whom the Express agreed to not identify because she buys unregulated weed at an unlicensed club, said the prices in the black market are sometimes half what they are in the permitted dispensaries. "And the quality is better," she said about the women of color health collective she frequents. "They have to move around a lot to avoid getting shut down," she said. But the collective's customer base is growing.

Anthony said Oakland needs to fix its tax situation fast, or even the big companies and equity businesses that are licensed and moving ahead with their plans will be damaged. He also expects to see a slight dip in retail sales for the big, established dispensaries as more consumers choose to go back to the underground market.

"The No. 1 thing the city can do for that equity program is adjust that tax rate and make the city competitive so both general and equity can stand or fall based on how competitive the jurisdiction is," he said. "Oakland is not in a good position."

As for the equity program, Anthony wishes the city would reconsider how it's created a bottleneck that prevents most of the existing market from becoming legalized. Combined with the taxes, it's a formula for building up the underground, and in the long-term, the city will lose tax revenue and find itself unable to shape the marijuana markets in ways that advance the public interest.

But on a more fundamental level, critics of the equity program question why the city has put the burden on the cannabis industry, rather than the state, to address the racism inherent in how the War on Drugs was enforced.

"I think the city council might want to look at its racist policing practices," said Anthony.


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