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Watsonville slashes tax rates in half for cannabis retailers, cultivators

Hoping to raise more revenue with lower rates — and allow its cannabis businesses to compete with neighboring jurisdictions — the Watsonville City Council on Tuesday approved drastically lower tax rates for cannabis growers and retailers.

Watsonville is trimming taxes for pot growers and retailers, hoping that lower rates will generate more funds and allow its cannabis businesses to better compete with both the black market and the rest of the state.

The city is cutting its tax rate on cannabis retailers in half — from 10% to 5% — and also halving its tax on cultivation, from $20 per square foot to $10. Taxes for nursery growers are getting slashed even more drastically, from $20 per square foot to $1.

The tax cut proposal was approved Tuesday by the Watsonville City Council in a 5-2 vote, with Mayor Jimmy Dutra and Councilmember Rebecca Garcia opposed.

Watsonville’s cannabis taxes were previously among the highest in the region, according to community development director Suzi Merriam.

Santa Cruz and Santa Cruz County tax dispensaries at 7%; Salinas, Marina, Hollister have rates of 5%; and Monterey County has the lowest rates in the region, at 4.5%.

Cultivation taxes are assessed by square footage or based on a percentage of sales, making direct comparison more challenging. But according to Merriam, Watsonville’s rates were “the highest of anywhere around.”

Watsonville set those rates under a voter-approved measure in 2016 — the same ballot on which California voters legalized recreational cannabis via Prop. 64.

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The high rates reflected a more cautious approach initially taken by the city compared to some of its neighboring jurisdictions. While allowing six growers to apply for cultivation permits, Watsonville at first prohibited dispensaries from opening within its borders. Last year, the city reversed course, passing sweeping changes to its cannabis regulations in June that included allowing three dispensary licenses.

The three dispensaries are on course to open later this year, according to Merriam.

“Now is the time to modify the tax rates to be regionally competitive so that Watsonville cannabis businesses have a chance to compete regionally and throughout the state,” she said.

City officials are hoping to rake in more tax revenue with the lower rates, especially as dispensaries open in the city for the first time. More competitively priced legal cannabis would also undercut the black market, Merriam said.

Not all on the council were convinced. Dutra argued cutting the tax rates wouldn’t make a meaningful impact on attracting businesses because the city caps its permits. He asked Merriam if the pool of applicants for Watsonville’s three retail permits would back out if the tax rate remained the same. “Probably not,” Merriam responded.

“We are lowering the taxes on the cannabis industry while raising the taxes on the residents of our community,” said Dutra, referencing a separate proposal before the council Tuesday to hike utility rates for water, sewage and waste.

On the other end of the spectrum, Councilmember Lowell Hurst wondered whether the city should lower the rate even further, to 4.5%, to match neighboring Monterey County. A dispensary is already open just outside Watsonville’s borders across the county line, and the Pajaro River.

“If you threw a stone across the bridge, you’d hit the dispensary there,” Hurst said, calling the tax cuts a “no-brainer.”

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