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Oakland Delays Pot-Tax Vote, but 'Damage Already Done'

It's impossible to know how much cannabis business has been lost to cities with lower rates. But it's a lot.

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Given how animated Oakland's pot industry became last May during debates over lowering the city's punishingly high cannabis-tax rates, it's almost eerie to witness how quietly it has reacted to the fact that the city council yet again has delayed action: basically, with a collective shrug of the shoulders, and a roll of the eyes.

The council didn't even take up the matter at its meeting last week, thanks to some by-now-predictable confusion over what the ordinance stated. The city's memo didn't match what council members thought they'd be voting on, which was a confusing morass to start with. They put off until Nov. 19 the discussion of an ordinance lowering rates.

"The two-week delay is not great, but it's been so long already that most of the damage is done," said James Anthony, the cannabis lawyer and founding chair of Oakland Citizens for Equity & Prosperity, a trade group that has been scratching and clawing for lower rates since adult-use cannabis became legal nearly two years ago.

"Still," Anthony said, "getting it resolved will definitely help businesses make decisions." The problem there is that the delay itself, coming after months and months of false starts, might provide yet more of an incentive for cannabis businesses to either move out of town or decide not to locate in Oakland in the first place.

Consider Flow Kana. With its administrative offices and a distribution facility located in Oakland, most of the company's operations are now up in Mendocino County. Some of them would likely be there regardless, since Flow Kana is a cultivator. But the company told the city in May that, even at that point, it had already decided to locate warehouse operations up north rather than in Oakland, which it would have preferred. That cost the city 70 jobs, according to Michael Wheeler, a Flow Kana vice president.

And then there are the companies that never came to Oakland in the first place. "The high taxes in Oakland are unsustainable, said Shareef El-Sissi, head of business development for The Garden of Eden dispensary in Hayward and co-founder of Treez, which makes a software platform for dispensary operators. His company, Eden Enterprises, is actually headquartered in Oakland, but it doesn't do any plant-touching business in the city, and therefore needs no license there. Eden decided to open manufacturing and distribution facility in Watsonville, which taxes manufacturers at just 2.5 percent, and doesn't tax distributors at all.

Back in May, representatives of the industry were by turns enraged and jubilant: enraged by the city's ongoing hesitation to cut its exceedingly high tax rate of 10 percent, and jubilant when the council's finance committee recommended a massive tax cut on the smallest businesses and recommended cutting the rate in half for the rest. Five percent wasn't great, but it at least would have matched Berkeley's rate. But then came a series of delays as various other actors weighed in: chiefly, the city staff, which warned that cutting the tax would hit the budget too hard, and eat into promised salary hikes. Meanwhile, several different council members wanted to slow the implementation of the cuts, while others wanted language in the ordinance that would guarantee the continued viability of the Oakland Equity Program, in which cannabis businesses provide support for smaller cannabis operations owned by people who have been hurt by the drug war — chiefly, minorities.

In some cases, when combined with the state's taxes on cultivation, manufacturing, testing, and distribution, that can amount to an effective tax on consumers of upward of 40 percent. That's the chief reason for the thriving illicit market (people buying weed from unlicensed dealers), which still makes up about 80 percent of the total pot economy in California. And even many customers who want to stay within the law take their business elsewhere: for example, to Berkeley, where Etienne Fontan, co-owner of the Berkeley Patients Group, is happy to serve them.

"Oakland has been driving people our way with its tax," Fontan said. But, he added, he'd still like to see the rate reduced because the faster the illicit market is shrunken, the better for the legal industry as a whole.

At this point, it would be a fool's game to try to guess precisely what the city council might do next week. But as things stand, the most likely scenario is to lower taxes to between 2.5 and 5 percent over two years for companies making more than $750,000 in gross receipts, depending on the size of the enterprise and what type of business it does. Cultivators and distributors, which run on thin margins, would get the lowest rates; retailers and manufacturers would get higher rates. All companies with revenues higher than $5 million would be taxed at 5 percent.

"Oakland has always led the way in cannabis," noted Amanda Reiman, Flow Kana's vice president of community development. The city, she noted, encouraged the growth of medical cannabis years before adult-use pot was legalized. "Now they have to lead the way in admitting when taxes are too high."

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