County struggles with unpredictable cannabis cultivation tax revenue

Santa Barbara County is anticipating a $6 million shortfall in the cannabis cultivation tax revenue it predicted for this fiscal year, thanks to an oversupply of wholesale cannabis in California and the resulting price decrease. 

“We overestimated revenues by almost 30 percent this year, and we don’t want to be in a position where there’s that much volatility,” County Executive Officer Mona Miyasato told the Board of Supervisors during an April 14 budget hearing.

At the tail end of the board’s budget discussions that day, 5th District Supervisor Steve Lavagnino asked fellow board members if they’d consider potentially changing the county’s cultivation tax structure. He said that while cannabis tax revenue rises and falls, the county needs a more stable, permanent source of funding.

“If you look at the cannabis tax right now, it is paying for: … it’s $2.5 million going into the maintenance fund, … it is providing the increase for those folks that do in-home health supportive services, it’s proving almost $800,000 in library funding, $3.5 million to the co-response program, homeless operating costs, the voter choice act, our translation services. It’s being used as kind of a catch-all, which is what it should be,” Lavagnino said. 

“But when we analyze this a little bit more, we’re finding out that while good actors are paying their fair share, our system that we’ve set up might be a little bit porous for those that find a way to manipulate the system,” he continued. 

Currently, the county taxes cultivators’ gross receipts. According to a Santa Barbara County grand jury report from 2020, while growers may prefer this method because it ties taxes to production, it “presents problems with verification of the volume of actual cannabis grown and sold and could be subverted by growers who try to hide their actual yield and sales.” 

The county Tax Collector’s Office is in the process of auditing cannabis taxes to ensure cultivators are paying the taxes they should to the county. At the same time, the county recently joined the California Cannabis Authority, which should give it access to data and analytics from across the state as well as state information on all the licensed operators in the county. A county staff report said that joining the state cannabis authority should also help staff develop more accurate tax revenue projections. 

County Cannabis Analyst Brittany Heaton said another issue with taxing gross receipts is the county’s cultivation acreage cap, set at 186 acres in Carpinteria plus 1,575 acres for the unincorporated areas in the rest of the county. All of those acres are spoken for, Heaton said, but are not necessarily producing cannabis yet. While some of that land is still in the permitting process, Heaton said there are growers who have finished the permitting process and are holding onto acreage under the county’s cap but not farming it yet. 

“They’re kind of holding it,” Heaton said, “waiting until the industry recovers.” 

Only 450 acres of land under the cultivation cap is producing right now, Lavagnino told the Sun. He said yet another compounding factor is that the county was anticipating making 4 percent of gross receipts off of already processed marijuana, which is worth more than non-processed marijuana. However, a lack of processing facilities in the county makes that difficult. 

Although supervisors all agreed at the April 14 meeting to direct county staff to study what changing the cultivation tax might look like, Lavagnino told the Sun that it’s looking less likely that the county will be able to recommend any changes in time to put them on the November ballot. He added that it’s hard to pin down exactly what those changes would even be. Whether the county uses a flat tax per pound, similar to the state, or square-footage tax, like other counties use, each comes with its own set of issues.

“This is not easy to come up with something that you’re basically just creating out of thin air,” he said. “You can look at other counties to see what they’re doing, but they’re having problems, too. … You’re not going to get this right the first time.”