County looks to avoid marijuana missteps
San Joaquin County hires consulting firm, moves forward with cannabis tax
The San Joaquin County Board of Supervisors voted to hire a consulting firm to assist with developing and implementing cannabis regulations and to move forward with a proposed tax on commercial cannabis activities during a Monday meeting in Stockton.
Following an address from the board’s newly-elected Chairman Bob Elliott, County Counsel Mark Myles advised the board to postpone hearing a proposed ordinance requiring permits for adults wishing to grow up to eight plants in their homes for personal use.
Citing Attorney General Jeff Sessions’ decision to rescind the Cole Memo, a 2013 document advising the U.S. Attorney’s Office not to prosecute cannabis businesses in states that had legalized its medicinal or recreational use, Myles advised the board to wait until Jan. 23 to vote on the proposed ordinance.
“This will give us time to look at the impact of the Cole Memo and make a more informed decision,” Myles said.
The board voted 5-0 to hire the Colorado-based consulting firm Freedman & Koski Inc., to assist with developing and implementing cannabis regulations for the county’s unincorporated areas. Andrew Freedman, the firm’s cofounder and senior director, addressed Supervisor Chuck Winn’s concerns that allowing commercial cannabis businesses in the county too soon could create loopholes that illicit operations could exploit.
Freedman used his firm’s experience working in Colorado to lower the number of plants individuals could grow in their home from 99 to 12 as an example of their ability to help governments develop regulations that cannot be easily abused.
“We spent time in Colorado addressing the illicit side. The way we approached it is through the continued divorce of the regulatory side from the illicit side. Anytime there’s a profit, there’s an opportunity to abuse it. We will work with law enforcement to prevent organized crime from coming in and abusing loopholes,” Freedman said.
Supervisor Tom Patti asked if Sessions’ decision raised any red flags for the firm. Freedman replied that risk for medical cannabis activities would be fairly low, although the decision might discourage community banks and credit unions from accepting cannabis businesses as customers. When Patti asked how long it might take the firm to develop regulations for San Joaquin County, Freedman gave an estimate of 22 weeks.
Winn then asked how effective Colorado’s efforts to regulate and enforce recreational cannabis have been. Lewis Koski, cofounder and senior director of Freedman and Koski, fielded the question, speaking from his experience both as a consultant and as a former police officer to say that enforcement efforts in Colorado have been successful. Koski said that a comprehensive citizen education process was one of the biggest contributing factors to that success as it gave citizens a better understanding of the laws.
“It’s a process that’s really evolved over time. The ability to enforce comes from really clear regulations and laws. When it comes time to enforce, people know what’s lawful and what’s unlawful,” Koski said.
Freedman then responded to Winn’s question of whether tax revenue collected from commercial cannabis businesses would be sufficient to cover both the immediate cost of enforcement and the long-term social costs. While Colorado was able to cover the immediate cost, the social costs will take more time to measure, Freedman said, although the revenue was not equally dispersed among the counties. Freedman also reported that use of cannabis by youths has decreased by 28 percent since the state legalized its recreational use in 2012.
“As a state, we were able to cover the public health and safety costs. The social cost will take 10 years to accurately measure. The revenue was enough for the state, and should have been enough for the counties,” Koski said.
The board then voted 3-2 to move forward with a proposed tax on commercial cannabis businesses and cultivation, although commercial cannabis activities are still banned in the county’s unincorporated areas. The board will vote on the tax measure following a public hearing on Jan. 23, before putting the measure on the November ballot. As a special tax, it will require both a majority vote from the county supervisors as well as approval from two-thirds of county voters. After being directed by the board, the county counsel began preparing the tax proposal on Oct. 24, 2017, according to Myles.
“At that time, we were looking at the cultivation tax based on square footage. At the board’s direction, we are now looking at it based on gross receipt payments,” Myles said.
Commercial cultivation and other businesses would both be subject to a tax of 3.5 percent per year. Cultivators would also be required to pay a fee of $2 per square foot of cultivation space. Myles predicts the tax will generate $2.8 million annually.
If approved by the board and voters, 70 percent of that revenue would go to public health, safety and enforcement, with the remaining 30 percent funding early childhood education and literacy programs as well as drug prevention, gang reduction and after-school programs in the first year. That ratio would change to 65 percent for health, safety and enforcement and 35 percent for youth programs the next year, and continue decreasing by 5 percent each year until the fifth year, when each category would receive 50 percent of the tax revenue, Myles explained.
Supervisor Kathy Miller reported on comments she heard from advocacy groups who asked that the tax measure’s oversight committee should contain no more than 15 people with expertise in child advocacy, finance and public health and safety. The groups also requested that the tax measure ensure that the oversight committee take steps to avoid a potential conflict of interest, she said.
“I received feedback from quite a few advocacy groups who requested that the language, in terms of accountability and oversight, be quite a bit more specific. No member of the oversight committee shall be a direct recipient of the special tax revenue. We want to make sure that the recommendations the board gets are accurate, and we need a vetting process with industry experts to make sure we’re making the best decisions possible,” Miller said.
Elliott raised the question of how to get people with relevant expertise on the committee if tax revenue will fund youth programs as well as public health, safety and enforcement. Miller explained that while the sheriff ’s department will receive tax revenue, law enforcement agencies from cities will not, and will therefore be eligible to serve on the committee.
“This tax would only be in unincorporated areas. We want to make sure that committee members are not making recommendations to fund their own departments, to avoid charges and criticism of conflict of interest,” Miller said.
Myles then responded to Winn’s question about a deadline to put the measure on the ballot, saying that he was not yet certain. Winn expressed concerns that the tax will not generate enough revenue to cover the county’s costs for enforcement, adding that he would prefer to wait for input from Freedman & Koski.
“If other counties want to move forward with this, then more power to them. I would like a period of time to look at the impact it has on them before making our own decision. I don’t want to move too quickly without looking at the consequences,” Winn said.
Patti then asked Freedman if his firm had looked at the tax proposal, and if they found any red flags.
“We’ve had the chance to look at the tax, and it seems in line with other counties. One thing is that the price of marijuana could drop over time. I would say that the flexibility built into the tax would probably be the best choice on the front end,” Freedman said.
Miller also said that, with $1.4 million already being spent on illegal cannabis activities, especially cultivation, enforcing legal cannabis cultivation and businesses would cost an additional $1 million. While she said that the tax revenue might not be sufficient, it is still the county’s best option to cover those costs. She added that taxfunded programs have been effective in decreasing the use of cigarettes by children, and that she hopes that the same will prove true for cannabis.
“Regulated cultivation is the only portion that will generate revenue to cover the cost of enforcement. Hopefully, there will be extra that will cover and pay for illicit grows, because those costs won’t go away,” Miller said.
Winn and Elliott, who cast the two dissenting votes, each voiced their own concerns about the proposed tax, which they felt would open the doors to allowing commercial cannabis activities in the county. Winn felt that funding childhood education is not reason enough to justify the tax in light of the potential health risks of cannabis, while Elliott said that he would prefer to keep the ban and look at how other counties regulate commercial cannabis activities.
“My question is, why approve something that we don’t know what the health risks are? I just don’t think we should move forward with this,” Winn said.
“I just don’t think it’s logical to justify cannabis activities by saying we’ll dedicate a portion of revenue to education. Are we really doing what’s best for children by making it easier for them to obtain cannabis and using part of the tax revenue to teach them not to use it? I think it’s unlikely to cover the cost of allowing this activity. I think the cost is likely to increase over time,” Elliott said.
Jacklyn Shaw, of Lodi, also spoke at the meeting, emphasizing the importance of preventing children from using cannabis and urging the board to consider the impact that commercial cannabis could have on the county’s agriculture industry when considering the tax ordinance.
“My request is for an ordinance with three parts: That anyone on the committee should be elected on the condition that they take a test for narcotic drugs to qualify, that rehabilitation be required and that their driver’s license be suspended (if they fail). This also poses a very serious threat to growers, and I hope that growers will be included in meetings,” Shaw said.