The Latest Fiscal Buzz? Medical Marijuana

Cities are taxing dispensaries to trim budget deficits

By Christopher Palmeri and Michael Marois/businessweek.com

Here's a sure sign that marijuana dispensaries are on their way to becoming big business: On July 13 the city council of Berkeley, Calif., asked voters to approve a 2.5 percent tax on the city's marijuana outlets, three of which grossed a total of $19 million last year, all cash. "This is huge," says Mayor Tom Bates. The tax will not only help close a $16.2 million budget gap, but it also makes sure that as the sale of pot goes mass market, the local community benefits, not outside business interests, Bates says. "We don't want to have Philip Morris coming in here, sucking up all the money."

Taxing pot sales is a growing trend across the nation as fiscally challenged cities eye the public's budding acceptance of marijuana use. Denver has generated $1.2 million since December, when the city began collecting sales taxes from its 256 dispensaries. On June 15, Washington, D.C., approved a 6 percent tax on what will eventually be five dispensaries.

Eighteen states now have laws allowing marijuana use for medical purposes. Nowhere is the revenue opportunity as large as in California. Therapeutic marijuana was originally intended to relieve cancer and AIDS patients' pain and nausea; California now allows it for insomnia, appetite loss, or any condition a licensed physician thinks marijuana would ease. The Board of Equalization, which supervises tax collection in the state, estimated in October that fully legalized marijuana consumption could generate $1.4 billion a year in state and local taxes. On the same night that Berkeley officials acted, the Sacramento City Council passed a similar measure, and the city of Long Beach adopted one on July 6.

More Golden State communities may follow if California voters approve a ballot initiative in November that would make it legal to possess an ounce or less of marijuana for recreational use. That measure, known as Proposition 19, allows cities to regulate and tax recreational uses of pot. Recent polls suggest voters are evenly divided in their support for it, although Senator Dianne Feinstein (D-Calif.) on July 12 said she would oppose the measure. If the initiative passes, marijuana advocates and researchers describe a scenario in which drug tourism floods the state, resulting in tasting rooms and specialized bed and breakfasts in the Northern California counties of Mendocino and Humboldt, where the plant is cultivated.

Marijuana advocates are conflicted. They want to see more respectability for the drug and at the same time don't want to pay more for it. "We're struggling with this," says Kris Hermes, legal campaign director at Americans for Safe Access, an Oakland (Calif.)-based nonprofit. "We know local governments are cash-strapped and looking for creative ways to raise revenue." Others see taxation as a sign of progress. "Citizens pay taxes, criminals don't," says Steve DeAngelo, the executive director of the Harborside HealthCenter, a marijuana dispensary in Oakland that campaigned for and won a marijuana tax in that city last year. "We should step up to the plate and pay our fair share."

The bottom line: Cash-strapped cities increasingly are turning to marijuana dispensaries to raise tax revenue and close budget gaps.