The Watsonville City Council at its Tuesday meeting overhauled its tax rates on cannabis businesses, a move the majority of council members said would make the city’s businesses more competitive with those in neighboring jurisdictions.
The changes will cut taxes on retail cannabis businesses in half, reducing them from 10% tax on gross receipts to 5%. The previous tax rates were approved by voters in 2016 with the passage of Measures L.
That move would align its retail rates with nearby Salinas, Hollister and Marina. It would also bring Watsonville close to its nearest competitors, Santa Cruz County (7%) and Monterey County (4.5%).
The city of Santa Cruz taxes its retail cannabis businesses at 7%.
Cultivators will also see a similar tax cut, as the new rate of $10 per square foot of canopy area is half of the previous rate. Cannabis nurseries, which in the past have been lumped in with all other cultivators, would only be taxed $1 per square foot of canopy area—the same rate neighboring Monterey County currently charges its nurseries.
The changes were approved by a 5-2 vote, with Mayor Jimmy Dutra and Councilwoman Rebecca J. Garcia dissenting.
Dutra said that the new taxes would have little effect on shoppers’ habits, and would only lower the already disappointing revenues the city receives to police cannabis businesses—last fiscal year cannabis brought in about $450,000 in taxes, City Manager Matt Huffaker said. Dutra also said that the lower tax rates would possibly open the “floodgates” for cannabis businesses to engulf the small city, which he did not want.
“I don’t even know if that $450,000 will cover all the costs that go into bringing cannabis into our community,” Dutra said. “So we’re basically paying for them to be here.”
Thanks to recent changes approved by the City Council, the city allows cannabis licenses in cultivation (6), manufacturing (15), distribution (2), retail (3) and delivery (7), plus an unlimited number of testing licenses. Community Development Department Director Suzi Merriam says that the city now has enough applicants to take up nearly all 33 licenses, with the exception of its manufacturing licenses.
It is unclear when Watsonville will welcome its first bonafide retailer. Merriam said the city received 12 applications from prospective dispensaries when it opened its application process last year. That included three businesses that applied for the city’s equity program, which sets aside one of the three retail licenses for small, local and minority-owned businesses owners.
The new rates, according to the prepared staff report, would generate between $1.4-2.6 million per year for the city.
Because of voter approved Measure M, those funds would go to the police (20%), fire (15%), community development (20%), parks and community services (25%) and library departments (8%). In addition, 12% of cannabis taxes go to nonprofit grants determined by the City Council.