OAKLAND'S POT DREAMS COULD BURST

OAKLAND -- Oakland rushed last week to raise medical cannabis
business taxes and to be the first city in the nation to legitimize
industrial-sized pot production. The cash-starved city is hoping to
reap millions of dollars in tax revenues from medical cannabis
businesses while positioning itself to capitalize on the explosion of
recreational pot sales should state voters go that way in November.

But is it just a pipe dream? No one really knows whether Oakland will
find that pot of gold in the cannabis industry. Growers and
dispensaries are making money, to be sure, and the city wants its
share. But competition, legal risks and the unknown economic effects
from potential legalization make the sure bet anything but.

California voters in 1996 overwhelmingly passed Proposition 215, the
so-called Compassionate Use Act, which decriminalized medicinal use
of marijuana. Dispensaries popped up almost overnight, supplied by a
cottage industry of growers selling pounds of pot for $2,500 to
$3,500, tax-free. Retail prices are double that, but not enough to
stop the flood of patients willing to spend more than $300 an ounce
for high-grade marijuana.

The estimated value of California's pot crop is $13.8 billion,
according to an analysis for California NORML, a nonprofit
organization devoted to marijuana reform. About 3 million people in
the state use marijuana, medical and recreational, and consume an
estimated 1 million pounds a year.

Oakland's four medical marijuana dispensaries do their share,
supplying patients with 6,000 pounds of pot worth $28 million last
year. The city is asking voters to raise business taxes on medical
marijuana sales to 5 percent, a rate that dispensaries, patients and
small growers warn will drive them out of Oakland and into
neighboring communities with lower tax rates or no taxes at all.

The four new industrial-sized farms the city plans to license in
January should do well, given the growing demand for medical
marijuana across the state. But the ventures are not without risk.
State law allows medical marijuana cultivation by collectives of
patients and caregivers, with no profiteering.

Although the Obama administration has pledged a hands-off approach to
honor states' laws, several experts warn that the federal government
may not be able to ignore commercial-sized growing and manufacturing
plants, which are not allowed under current state law.

That is a concern expressed by Oakland Councilmember Nancy Nadel, who
sees pros and cons in the plan and worries about excluding small
growers. "I was willing to go along with some large growers, but is
this an invitation to federal attention? It puts a lot of product in
one space, so if there is a fire, or theft, or mold, you could impact
the availability of product to the patients," Nadel said.

New Tax Revenue

Still, it's easy to see why the City Council majority backs the
concept of large indoor farms. Regulating medical marijuana
production in modern facilities located in industrial areas should
ensure a reliable, consistent supply of high-grade marijuana. It
conceivably should cut down on the hundreds of dangerous, illegal
grow houses spread around Oakland, especially if the huge growers can
offer lower wholesale prices. It also makes it easier for the city to
track the money.

Perhaps the most convincing argument arrived in a report commissioned
by Jeff Wilcox, a retired contractor who first approached city
leaders about the commercial grow idea. His proposal for a
100,000-square-foot AgraMed cultivation facility would produce 21,000
pounds of pot with a wholesale value of $60 million. That translates
into $3 million in new tax revenue for the city and 300 to 400 jobs
for Bay Area residents -- from just one business.

That's on top of the revenue the city will get from its four
dispensaries. If sales remain static, the city stands to gain another
$1.4 million.

Dale Gieringer, director of California NORML, says Oakland is smart
to get ahead of the curve, and it could gain millions in new tax
revenue if the city's sales and production estimates pan out. But
setting too high of a tax rate could backfire initially, and he
thinks that establishing the large-scale production facilities will
be neither quick nor problem-free.

"I think there is a risk here on jumping ahead on this tax on medical
marijuana," Gieringer said. "San Francisco doesn't have a tax. At 5
percent, this gives other places an advantage. Oakland could be in
danger of killing the goose that lays the golden egg. Patients will
not go to Oakland if they can go to San Francisco and get it cheaper."

Oakland might have been the first to realize the revenue benefits of
taxing medical marijuana businesses, but several other economically
strapped municipalities are following its lead. San Jose, Richmond
and others are scrambling to place similar tax measures on the
November ballot. Berkeley is asking voters to raise cannabis tax
rates as well as allow up to six commercial cultivation facilities.

Oakland's four proposed cultivation permits are intended for
medicinal production only -- for now. The proposal also lays the
framework should Proposition 19 pass in November, legalizing
recreational use of pot for adults 21 and older. The city is asking
voters in November to set the business tax rate for recreational
sales at a whopping 10 percent.

But will it be a bonanza or bust?

Legalized Pot

According to a RAND Corp. study released this month, legalization
could boost the number of pot smokers and drive down the pretax price
of an ounce of pot by as much as 80 percent. The authors warn that it
potentially could fuel problems with smuggling as dealers from other
states rush to buy low-cost cannabis in California.

"Legalization would drive the price so low that even if taxes are
high, marijuana coming from California would still be cheaper than a
lot of places in the country," said Beau Kilmer, lead author of the
study and co-director of the Drug Policy Research Center. "If dealers
come here to buy several pounds, pay the taxes and then smuggle it
out, they would still make money."

Even with hefty state or local taxes added on, consumers likely would
pay hundreds of dollars less than they do now. That's good news for
patients who rely on the herb to ease their pain, control their
nausea or boost their appetite, but it could put a huge dent in the
amount of tax revenue the city collects from its medical marijuana
dispensaries.

If the wholesale price of medical marijuana drops to $800 a pound, a
scenario Wilcox said could happen, the city's cut would drop to $1.35 million.

"Right now there's an 85 percent profit margin (enjoyed by the
growers and dispensaries), and that's too high, in ?my opinion,"
Wilcox said. "If you can grow for $400 and sell it $800 wholesale,
people will be doing just hunky-dory."

Oakland Councilmember Desley Brooks said she's not pinning all her
expectations on legalization, especially when there is plenty of
revenue to be had from the medical cannabis industry.

"There's a lot of money in that industry and not a lot of
regulation," she said.

Kilmer said his work focused on what might happen if marijuana were
legalized in California. The Regulate, Control and Tax Cannabis Act
2010 ballot initiative would allow people 21 and older to possess,
grow or transport small amounts of pot for personal use. Cities and
counties could choose whether to regulate and tax the commercial
cultivation and sales of marijuana or to keep such activities illegal.

"The impacts of legalization on medical marijuana is unknown," Kilmer
said. "But it will be interesting to see what happens in Oakland
because it's unclear what the feds will do" about the commercial growers.

Mark Kleiman, a UCLA professor of public policy who has written
extensively on the topic, believes cities such as Oakland that are
hoping to cash in on medical marijuana, and legalization if it
happens, should try to see through the dollar signs to the possible pitfalls.

"Yes, (Oakland is) in for a big letdown," he said. "Competition among
growers and among jurisdictions would drive legal prices through the
floor, leaving California with a large (illegal) export trade to the
rest of the country and not much revenue. The feds wouldn't hold
still for it and would crack down."

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BALLOT INITIATIVES

Oakland: 5 percent tax on medical cannabis dispensaries and
cultivation facilities, 10 percent for recreational production and sales.

# Berkeley: 2.5 percent for medical marijuana, 10 percent recreational.

# Sacramento: 4 percent medical marijuana, 10 percent recreational.

# Richmond: 5 percent medical marijuana, 5 percent recreational.

# San Jose: 10 percent medical marijuana.*

# Long beach: 5 percent medical marijuana, 10 percent recreational.

# Stockton: 2.5 percent medical marijuana, 10 percent recreational

* Proposed