Local Opposition to Washington’s Legal Marijuana Businesses Is a Taxing Issue For the Fledgling Industry

Effort to Overcome City Moratoriums on Cannabis Shops Could Spark an Unlikely Alliance

The great experiment in the state of Washington to legalize the sale of marijuana through a regulated and taxed market has hit a hitch at the local level that threatens to slow progress to a snail’s pace, even as more and more marijuana businesses obtain the state licensing needed to open their doors.

Through early November, Washington’s cannabis market, state records show, included some 63 retailers, 239 producers and 197 processors — all issued the required state-level licenses to begin doing business in the state. But the battle ahead for many of them — and others in the pipeline — to actually open their doors for business is far from over.

The pushback is coming at the city level, in part from small but well-organized citizen groups, who essentially don’t want marijuana businesses to open in their neighborhoods. These groups are putting heat on local politicians to ban pot businesses, and they are having success, even in areas that voted overwhelmingly for legalizing marijuana.

Some 40 percent of the 281 cities in Washington have instituted bans or moratoriums preventing state-approved marijuana businesses from operating within their borders, figures compiled by Washington’s Municipal Research and Services Center show. Those actions vastly restrict the potential footprint for the state’s fledgling legal marijuana market and consequently its potential for long-term success.

But there is a major twist to this prohibition effort.

“We’re in the middle of a war of unfunded mandates by the state,” explains Jedidiah Haney, the executive director of CAUSE-M, a cannabis-business advocacy group based 150 miles southeast of Seattle in the City of Yakima, which is one of the Washington cities that has banned marijuana businesses.

Haney adds that several politicians have told him the ban in Yakima, as well as in some 110 other cities statewide that have bans or moratoriums on marijuana businesses in place, “has been organized by the cities to put pressure on the state Legislature to provide more funding to the cities.”

Dr. Dominic Corva, Ph.D., executive director of the nonprofit Center for the Study of Cannabis and Social Policy, says the moratorium fever that has swept the state also is due, in no small measure, to the success of well-organized local opposition groups who, for a variety of reasons — ideological, religious, business interests and due to a “not in my back yard” mindset — have put pressure on their city leaders to prevent cannabis businesses from opening in their communities. And that’s occurring even in some cities that voted overwhelmingly in favor of I-502 — the initiative, approved by Washington voters in 2012 that created the state’s legal marijuana market.

Like Haney, though, Corva also sees another big factor in the moratorium equation, which is likely making it easier for local opposition groups to sway their elected officials. And that factor is not opposition to cannabis itself, but rather “the cities’ desire for more tax revenue” from cannabis sales, Corva says.

Taxes, Not Cannabis

The new excise taxes imposed on marijuana business under the I-502 law are directed exclusively to state coffers — to fund health-care, drug-abuse prevention, state regulatory efforts and other initiatives. Under the law, a 25 percent excise tax is imposed on product sales at the grower, processor and retail levels, on top of sales and business-and-occupation (B&O) taxes. Recreational pot sales are projected to add some $636 million in revenue to the state’s coffers through mid-2019 alone, state economists project.

However, local communities do not get a cut of those excise taxes. Consequently, to them, the cost of licensing and regulating the startup cannabis shops, growers and processors, and assuring public safety, is seen as an added burden with little upside. The cities do get a slice of the sales and local B&O taxes, but it’s a quite low percentage and simply not enough to offset the costs to a community of supporting marijuana businesses, according to Candice Bock, government relations advocate (a lobbyist) for the Association of Washington Cities.

The AWC is a nonprofit membership group representing and supported by all 281 cities in Washington. The group’s most recently available tax filing with the IRS shows that it had revenue of $8.4 million in 2012 — of which some $1.5 million was spent on “state and federal relations,” which includes lobbying.

This past February, AWC sent out a letter that made some waves in the Washington media. It was addressed to Washington’s governor and members of the state Legislature, and signed by about 100 local mayors. The letter, Bock told Narco News, was drafted “in support of a position the AWC board took on the tax subject, but each city that signed on had it’s own approval process.”

“The letter certainly was an organized effort to impress on the Legislature and governor our need for more revenue sharing,” Bock adds.

Following is an excerpt from that letter, sent out by the AWC in February of this year, about six months before the July 2014 launch date for recreational marijuana sales in Washington:

Communities are already feeling the impacts of legalized marijuana, even before retail operations open this summer, which will dramatically expand access. The state has only 69 liquor enforcement officers and they will only focus on licensing. All other oversight and enforcement falls to local governments.

Cities can’t accommodate the increased needs created by legalization of marijuana without funding. We can’t wait. This is already having an impact and will only increase in the next few months as businesses start up operations.

The AWC letter followed on the heels of an opinion issued in mid-January by Washington’s Attorney General that supported the cities’ position on the legality of cannabis-business bans and moratoriums. The Attorney General determined that I-502 “did not require local governments to allow marijuana businesses.” A subsequent court decision in Washington further buttressed the AG’s position.

Bock says the lack of revenue for local municipalities clearly is a factor in the decision by many cities to institute marijuana-business moratoriums or bans, though she stresses each city is different and other concerns do enter into the picture — such as local citizen opposition and “concern about compliance with federal law.

She adds that the AWC does engage in direct lobbying and plans to make a hard push for marijuana tax-revenue sharing with cities during the upcoming Legislative session.

If successful, Bock says the bulk of the new revenue brought into the cities would go to fund criminal-justice and public-safety costs related to the legal marijuana market. But, she adds, the money also could help cities fund other services for citizens as well, such as street repairs, garbage pick-up and the fire department. That could translate into tax relief for local citizens, always a voter friendly move that might help alleviate a moratorium fever.

The cut that the cities, as a group, are seeking, according to Bock, is 50 percent of the marijuana tax-revenue pot. That’s the amount dedicated  under I-502 to fund Washington’s Basic Health Plan, which provided low cost coverage for the working poor — a plan that has been phased out as a result of the rollout of Obamacare.

It seems like a lot, but Bock stresses “that’s a starting point.”

The dynamics in play between Washington’s cities and the state’s Legislature are not lost on Haney. He recognizes that cannabis businesses in his city and elsewhere are now stymied by moratoriums and bans, adding that they are the victims of “an unfair business environment” in which state and local laws in numerous cities are now seemingly in conflict. But he also understands that fighting the battle at the street level, one city at a time, ultimately is not the best strategy.

“We’re gearing up to lobby at the Capitol this coming Legislative session because we realize we can’t win this at the local level alone,” Haney says.

Heavy Lifting

But the path ahead for cannabis-business interests in the 2015 Legislature in Washington will be marked by “some heavy lifts in a hard revenue environment,” according to Craig Engelking, a lobbyist for the Cannabis Coalition for Standards & Ethics as well as for Americans for Safe Access. He says legislators in Washington have to address a court order to better fund basic education in the state, a multi-billion dollar problem, on top of sorting out a variety of issues on the legal cannabis front — including how to regulate the state’s decades-old medical-marijuana market, which was not addressed under I-502, as well as the overarching tax issues.

“Getting more revenue to the cities should help lift many of the moratoriums,” says Engelking, who, prior to starting his own firm this year, served previously as the chief state lobbyist for the City of Seattle. “But at the same time, expect the state to fight against revenue sharing with the cities because they need that money to fund education.”

To have a shot at success on the legislative front, experts following the cannabis market told Narco News, the cannabis community will have to put aside their individual pet issues for now and make it a priority to get organized as a group around some clear, common goals and develop a strategy to achieve them.

In the case of the battle ahead in the state’s Legislature, it appears one strategy that might have to be considered is finding common ground with the apparent enemies of cannabis businesses — many of the cities with moratoriums in place — given they may well prove to be convenient allies in the larger battle to make the legal market for marijuana work over the long-term in Washington.

In the end, revenue sharing with cities also is likely to benefit cannabis businesses by creating a powerful economic incentive for many cities to end moratoriums — even in the face of NIMBY opposition.

“Both Colorado and Oregon [which have legalized and tax marijuana sales] recognized the need to share revenue with local jurisdictions, so that helps our argument,” AWC’s Bock says. “… I expect there will be cities that move away from the moratoriums if they get some more tax money.”

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