- Posted by Ryan Reaves
- On December 20, 2017
- banking, California, cannabis, Federal Law, Medical, policy, prohibition, public banking, recreational, state law, taxation
Can public banking in California help solve financing and tax complications for cannabis business?
More than half of the United States has at least some access to cannabis either medicinally or recreationally as of 2017. Eight states have legalized recreational use, while others have medical systems which vary in their capacity to facilitate patient access. All-in-all, 29 states are fostering emerging cannabis industries which hypothetically will someday be able to initiate legal interstate trade, requiring federal oversight and regulation. California has the oldest medical cannabis system in the country, beginning in 1996 with the passage of Prop-215 as a ballot initiative organized by HIV/AIDS activists in the San Francisco Bay Area. California’s recreational system is due to come online in January 2018, prompted by the recent release of emergency regulations announced by the Bureau of Cannabis Control. California is potentially one of the largest producers of cannabis globally, with trade networks operating illicitly for decades, diverting cannabis to markets in other states and countries.
California regulators, although tempted by the potential for establishing a lucrative new stream of tax revenue, face a daunting obstacle to effectively collecting these taxes. Until cannabis is rescheduled federally, no FDIC insured banking institution may legally handle accounts involved in commercial cannabis due to federal reporting procedures relating to both the 1986 Money Laundering Control Act and 1970 Bank Secrecy Act. Banks that willingly handle cannabis accounts without strict oversight risk losing their FDIC backing. This typically results in commercial cannabis businesses having their bank accounts closed, often without warning, when they are identified by security protocols within the institution. Cannabis producers and distributors, with limited access to banking and financing, pay their state and local taxes in cash, which can be tens of thousands of dollars.
Public Banking in California
To get around federal restrictions involving cannabis and banking, several large municipalities in California are considering a public bank alternative. A public bank is operated in the public interest through institutions owned by the people through their representative governments. Public banks are established by mandate and beholden to the public’s interest rather than held by private shareholders who typically seek short-term gains on investment. Public banks return their profits to a general fund held by a public entity allowing them to lower certain taxes within their authority, reducing costs for public projects undertaken by governmental bodies.
California Treasurer John Chiang, after meeting with different stakeholders and conducting public meetings between 2016 and 2017, has recommended that the state consider creating a government-owned bank that could serve cannabis businesses. Serious challenges to public banking at the state level are the significant potential costs to the state and whether a public bank can even legally serve the cannabis industry due to the federal governments ability to control access to the Federal Reserve System. Although the idea is attractive in theory, a study must be completed by the state attorney general before any further developments can occur.
San Francisco, East Bay, & Los Angeles
Public banking at the city or regional government level may be more feasible. Several large cities in California are funding feasibility studies to determine if public banking is a seriously viable option. San Francisco County Supervisors Malia Cohen and Sandra Fewer are promoting the establishment of a municipal bank that could allow the city to end its use of national banks and potentially work with the cannabis industry. In the East Bay, Oakland and Berkeley have collectively contributed $100,000 dollars to a feasibility study for the creation of a regional public bank to serve the extensive commercial cannabis industry in the area. Major components of the study will look at banking requirements for handling cannabis business deposits, as well as determining the institutional capacity necessary for a regional public bank to sustain itself and provide community benefit lending.
In July 2017, Los Angeles City Council President Herb Wesson challenged his council to create the nation’s first ever city-owned bank. Although cannabis is likely a component for the rationale in establishing a public bank in Los Angeles, the motivation behind the idea may have more to do with the city’s relationship with national commercial banks. Los Angeles currently does most of its banking with Wells Fargo, who settled a lawsuit with the city in September 2016 for $185 million over the unauthorized creation of numerous fraudulent accounts beginning in 2011.
The Benefits of Public Banking go Beyond Cannabis
San Francisco and Los Angeles are motivated by the potential for public banks to help address issues relating to affordable housing and financing for municipal projects. When speaking to the L.A. City Council, Wesson stated that a city-owned bank could “provide the best financial solution to reducing the cost of the creation and rehabilitation of affordable and workforce housing in the City… while providing low cost financial services for city residents and local governments”. Similarly, a Budget Analyst report in San Francisco concluded that a public bank could make more funds available for affordable housing, support small business development, produce loans for low-income households, lower financing costs for infrastructure projects, and “within a few years… generate sufficient revenue to be able to cover its costs and serve as the primary financial institution for the city”. An additional report by San Francisco’s Attorney’s Office is still pending to assess the legality of publicly handling commercial cannabis accounts, resonating with the uncertainty at the state level.
Despite being a potential solution for commercial cannabis and banking, it seems no level of government is quite certain yet if it would actually be legal due to conflicts with the Controlled Substances Act , banking regulations and access to the Federal Reserve System. It is interesting to consider however, that an idea popularized by recent discussions involving commercial cannabis, may have helped to inspire policy makers to seriously consider public banking as a solution to other pressing challenges facing Californian cities.
Ryan Reaves is a Public Policy Analyst for CannaBusiness Law and Master of Public Policy candidate at Mills College in Oakland, California.
Featured Image by: Basil D Soufi