Desert Hot Springs Approves Temporary Reduction In Cannabis Cultivation Tax

The Desert Hot Springs City Council last week voted in favor of temporarily reducing taxes for cannabis cultivators.

“When Desert Hot Springs initially embraced legal cannabis, it was met with strong demand for related development,” Economic Development Director Sean Smith said during the April 4 council meeting. “Since then, the industry has experienced significant slowdown and has fallen well behind early growth projections.”

Smith said the entire cannabis industry was experiencing “substantial financial strain,” a sentiment echoed by those who came to speak in favor of the temporary reduction.

“I am certainly not against taxes. On the contrary, I want Desert Hot Springs to thrive as a community, and I want the cannabis industry to thrive in Desert Hot Springs,” Paula Turner, treasurer for Coachella Valley Cannabis Alliance Network (CVCAN), said. “However, in order for that to happen, Desert Hot Springs needs to be competitive and fair with their tax rate and structure.”

According to Turner, cultivators were able to sell their product for up to $2,000 per pound just two years ago. Now, she said, the price per pound was between $800 and $1,200. That coupled with the declining economic outlook of the cannabis industry — state tax data shows commercial cannabis sales fell by 8% last year — has left companies struggling to make ends meet.

“I used to have 150 employees that I employed in Desert Hot Springs,” Ethan Woods, CEO for Zenco Capital, said. “Right now it’s 88. It may be fewer sooner, maybe down to 55, maybe down to 50, and that’s because the overall economic outlook of the cannabis industry has gone to crap, honestly.”

Woods said his company, which used to focus solely on cultivation, is now looking into manufacturing and distribution.

“And if I’m experiencing that right now, I know that every other person, every other leader that’s going to come to this town and that’s going to attempt to build a business or to have a business flourish is going to go through the same exact thing,” he said. “And if this town doesn’t listen to making a better economic outlook for businesses, for leaders, then it won’t see the same sort of business outlook that it sought to create years ago.”

Real estate developer David Schneider emphasized the urgency of the matter, telling the council that if they did not “do something quite drastic and do it quite quickly,” there was a real possibility businesses would leave.

“Your leadership has allowed these businesses to move in here and invest a lot of money, and doing this and considering this, I think, will give these businesses a chance to survive,” he said. “And so I commend you for your leadership in doing it and I hope that you’re able to take the information that these people have given you, and take it to heart in your decision making.”

After hearing from the public, and receiving a number of other comments via email, the council approved a temporary 50% reduction of the cannabis cultivation tax — decreasing the cannabis cultivation tax from $10.20 per square foot to $5.10 per square foot for the first six months of the year —  and directed staff to conduct a comprehensive analysis of the cannabis industry in Desert Hot Springs.

Smith said the city’s Cannabis Emergency Reserve, a fund that receives 25% of the city’s cannabis tax revenue and currently has more than $5 million in it, would be used to cover the nearly $1.2 million loss in revenue expected from the tax reduction.

Councilmember Jan Pye, who had advocated for a temporary 25% reduction until that comprehensive analysis could be completed, voted against the motion.

“We’re trying to work with you, we need you to work with us also,” Pye said. “It’s only temporary for this time because we recognize that you’re not doing well, we recognize that, but on the other end staff is going to do a comprehensive analysis to find out exactly where we should be.”

And though Councilmember Gary Gardner ultimately voted in favor of the temporary 50% reduction, he initially said he agreed with Pye on approving the smaller reduction.

“I would hate to go to a bigger reduction, and then come back and realize, you know, it’s gonna be more than that, so we’re gonna put you back up,” he said. “This is just temporary for now, but I think you can be assured that this council will take some permanent action before that tax payment is due for the second half of the year.”

Both Mayor Scott Matas and Councilmember Russell Betts said they would like to see the city provide even more relief for businesses in the cannabis industry.

“We’re at a point in the industry, and I’ve been advised by many of you in the audience, that we have to do something now to help the industry,” Matas said. “And even though Mr. Betts always thinks he’s on an island…I’m going to be supporting his thoughts here today.”

Before the temporary tax reduction can take effect, it will have to come back in front of the council in the form of an ordinance at a future meeting.