The Cathedral City City Council will consider adopting a resolution reducing the cannabis taxes

CATHEDRAL CITY — The cannabis industry in this community is about to get a financial break. The City Council is poised on Wednesday to adopt a resolution reducing the cannabis dispensary tax rate to 5% of gross proceeds, the cultivation rate to $10 per square foot, and the manufacturing per piece tax rate to $0.05 cents.

Staff is recommending the City Council adopt the resolution.

This agenda item is the result of collaborative discussions between Cathedral City cannabis business owners, Cathedral City’s Cannabis Taskforce, and the City Council dating back to Sept. 8, 2021, according to Stone James, economic development director. A total of 10 meetings took place surrounding the issue of taxes on Sept. 8, 2021; Nov. 29, 2021; Jan. 19, 2022; April 11, 2022; April 20, 2022; May 11, 2022; June 8, 2022; August 10, 2022; September 14, 2022; and November 30, 2022.

During the January 25, 2023, City Council study session, staff presented an analysis based on the culmination of these meetings, a police and fire calls-for-service analysis, and the results from a mixed-methods analysis of Cathedral City cannabis businesses.

As a result of the meetings, feedback, and research over this 17-month span, the Council directed Staff to (1) bring forward a resolution amending current tax rates to reflect a dispensary tax rate of 5%, cultivation tax rate of $10 per square foot, and a manufacturing per-piece tax rate of $0.05 cents per piece, and (2) ensure the City has the ability to reduce the number of outstanding and unused licenses.

Since the Jan. 25, 2023, Cathedral City study session, the City of Palm Desert Economic Development subcommittee concluded its own research. During the Feb. 16, 2023, Palm Desert City Council meeting, the subcommittee plans on recommending the adoption of a 5% dispensary tax rate and a $10 per square foot cultivation tax rate.

Neighboring Jurisdictions’ Taxes

Staff reviewed cannabis taxes in the cities of Palm Springs, Palm Desert, Desert Hot Springs, and Coachella. Currently, La Quinta, Indian Wells and Rancho Mirage do not allow cannabis businesses. On July 20, 2022, the city of Indio authorized the opening of no more than five dispensaries within city limits. A dispensary tax rate has not been determined however, given other Valley cities’ 10% retail tax rate and City of Coachella’s 6% retail tax rate, the Indio City Council is discussing a retail fee approximating a tax rate of 5% or 6%. Dispensaries are the only type of cannabis business the Indio City Council has authorized.

Fiscal impact to the city

In calendar year 2021, total cannabis taxes paid to Cathedral City were $4,971,001. In calendar year 2022, total cannabis taxes paid to Cathedral City were an estimated $3,693,000, according to James.

Based on 2022 collections, each 1% reduction in the retail tax should result in a revenue loss of $125,000/year.

A reduction in the cultivation tax rate to from $15 to $10/square foot would result in a revenue loss of $710,000. The reduction assumes current cultivation activity remains constant and no Cathedral City businesses leave Cathedral City and relocate to lower tax jurisdictions. Alternatively, a lowering of the tax rate may attract new businesses into Cathedral City and therefore increase total potential tax revenue.

Image Sources

  • Cannabis Cultivation: Shutterstock