San Francisco’s legal cannabis consumption could triple to 30 million grams annually in the new era of recreational pot and total sales could hit $240 million, according to a draft city report.
Medical marijuana is currently legal in San Francisco and sold by 45 city-permitted dispensaries or delivery services, but the market will significantly grow when recreational cannabis becomes legal next month.
That could mean a boost in revenues for The City’s coffers if voters approve a cannabis tax next year. City officials are examining a potential tax measure to bring to voters under a task force established by Mayor Ed Lee earlier this year.
A 1 percent gross receipts tax on cannabis businesses would generate between $1 million and $2 million in revenue annually, while a 20 percent gross receipts tax would generate between $23 million and $43 million, according to the City Controller’s draft cannabis tax report, which was provided to the San Francisco Examiner upon request.
The report did not analyze a specific ballot measure, only what potential revenue there was under various tax scenarios and market conditions.
Voters in thirty-six Californian municipalities have already established local taxes on cannabis businesses. They were asked to approve them on the November 2016 ballot when also being asked to support Proposition 64, which legalized recreational cannabis beginning Jan 1.
Most of the approved local cannabis gross receipts taxes have a maximum rate between 10 percent and 15 percent.
“We are estimating that a 10 percent gross receipts rate would generate anywhere between $12 million and $23 million,” Jay Liao, an economist with the City Controller’s Office, said in an email Thursday to the Examiner. “The large variation just reflects the uncertainty around what will happen in this market.”
The uncertainty is how much cannabis is ultimately consumed in San Francisco and what happens with the prices of the product.
“The price of cannabis is expected to fall dramatically,” the report said. “ In Washington, the average retail price per gram fell from $23.33 to $8.66 in the first two and a half years of legalization.”
That price reduction came as cannabis consumption increased from 80,000 grams to 8,000,000 grams in Washington since legal sales began there in July 2014.
In San Francisco, the medical marijuana industry currently sells about 10 million grams of cannabis annually. Once recreational sales begin, total regulated cannabis consumption is expected to increase to between 18 million and 30 million grams.
The current cost of a gram of cannabis in San Francisco is $14, which is expected to decrease to about $7 to $8 per gram.
The report estimates between $130 million and $240 million in recreational and medical cannabis will be sold annually.
Pro-cannabis advocates have warned a high local cannabis tax rate would only incentivize cannabis sales on the black market and could hamper opportunities for lower income residents to enter the business.
The report also identifies this risk.
“While Prop. 64 will reduce black market consumption, some of this reduction will be offset as local taxes are administered,” the report said. “Higher tax rates will increase the effective price of cannabis and consumers will either shift spending to other goods or buy their cannabis outside of the regulated market.”
Los Angeles has a 5 percent gross receipts tax on medical marijuana and 10 percent on non-medical. San Diego set an initial rate of 5 percent that increases to 8 percent in June 2019. San Diego’s City Council can increase the rate up to 15 percent.
Solano County established a flat gross receipts tax rate of 15 percent. Monterey County has established a 10 percent gross receipts tax for all marijuana businesses and a $25 per square foot for cultivation, and $5 per square foot for nurseries.
The possibility of a local cannabis tax comes at a time when the mayor has asked city departments to cut spending by 5 percent over the next two fiscal years to close a cumulative budget deficit of $262 million and as other taxes are being contemplated for specific needs.
Supervisor Aaron Peskin, for instance, has introduced for the June ballot a gross receipts tax increase on the rents collected by landlords for leasing of commercial office space to generate about $100 million annually for transit needs.
The state’s cannabis tax under Prop. 64 kicks in on Jan. 1. There is a 15 percent state excise tax on the sale of both medical and adult-use marijuana and a weight-based cultivation tax of $9.25 per dry weight ounce of flower and $2.75 per dry weight ounce of leaves.
Statewide, the cannabis industry is expected to have more than $7 billion in sales annually and generate an estimated $1 billion in tax revenues.
On Wednesday, the mayor signed into law recreational cannabis regulations, a day after the Board of Supervisors approved them, ensuring retail sales of the drug for recreational use can begin next month.