Santa Barbara County’s Cannabis Tax Reform Fizzles Out

A proposed cannabis tax increase that was designed to address the problem of chronic under-reporting by some outdoor growers failed to pass muster at Tuesday’s Board of Supervisors hearing, at least for now.

Currently, as approved by the county voters in 2018, cannabis growers are required to pay a quarterly cultivation tax of 4 percent of their gross receipts, or sales. On the table Tuesday was a “hybrid” option that would have assessed a minimum quarterly tax of 10 cents per square foot for outdoor cannabis and 50 cents per square foot for greenhouse cannabis — or 4 percent of gross sales, whichever was greater.

The reform was billed as a way to address both the under-reporting and the glaring tax disparity between outdoor growers, who operate chiefly in the North County, and the greenhouse, or “indoor,” growers of the Carpinteria Valley. During fiscal year 2022-23, records show, the county collected $5.5 million in cannabis taxes. Indoor growers paid 82 percent of the total, and outdoor growers paid 18 percent.

Tuesday’s hearing was the board’s last chance to put a cannabis tax measure on the November ballot, but they needed four votes to do so. Supervisor Bob Nelson proposed lowering the quarterly square footage tax to 5 cents for outdoor growers and 3.75 cents for indoor. Only he and Supervisor Laura Capps voted in favor.

Supervisor Joan Hartmann abstained, saying she could not support last-minute changes. Supervisor Das Williams abstained, too, saying, “We want growers to stay in-county.” Williams also questioned the wisdom of placing two tax measures on the same ballot: On Tuesday, the board voted, on a first reading, to put a measure on the ballot that would increase the hotel “bed tax” from 12 percent to 14 percent in unincorporated areas.

Board Chair Steve Lavagnino, an opponent of cannabis tax reform and a co-architect, with Williams, of the county’s 2018 cannabis ordinance, was absent. Lavagnino represents the Santa Maria Valley.

At Tuesday’s hearing, which was held in Santa Maria, a number of cannabis industry representatives warned the board that any change in the cultivation tax status quo might force them to quit or take their business elsewhere. They noted that the hybrid option would allow the board to adjust square footage rates upward every two years, to a maximum of 75 cents and $2.50, respectively, for outdoor and indoor “grows” — rates they said were extreme.

Calling the proposal “unpredictable and burdensome,” Kevin Wilson, the chief financial officer of LEEF Brands, one of the largest cannabis companies in California, said that after spending four years and raising millions of dollars, the firm was finally ready to start planting on 180 acres in the Cuyama Valley. The LEEF operation, located at 100 Salisbury Canyon Road, is poised to become the largest in the county, but Wilson said it would not survive if the board “has the authority to increase the tax rate at will.”

“The cannabis industry operates on thin margins, and any unexpected tax hikes could be detrimental to the livelihood of hundreds of workers,” he said.

David Van Wingerden, a co-owner of Farmlane, with 14 acres of greenhouse cannabis at 1400 and 1540 Cravens Lane in the Carpinteria Valley, urged the county to rely on tax audits to make sure all growers were paying their fair share.

“You’re trying to put a blanket over the industry to resolve the issue of a few operators who are not paying appropriate tax,” he said.

At the same time, Jules Nau, a boardmember of the Santa Barbara Coalition for Responsible Cannabis, a countywide group that seeks stronger regulation of the industry, said the board should increase the square footage rates and “close the loopholes to prevent tax avoidance.”

“It’s time our community reaps the benefits through enhanced public services funded by these businesses,” he said.

In the past, the board has expressed frustration with county’s ongoing tax audits, which are expensive and time-consuming. Projected cannabis tax revenues have come up short three years in a row: This year, they are projected to be $5.7 million, or $1.8 million less than was projected. The ongoing annual cost of administering the cannabis program, providing cannabis education, and enforcing the law against illegal operators is $4.9 million.

On Tuesday, Nelson called on the industry to cooperate with the county, not only on tax compliance, but also odor control. The “skunky” smell of cannabis in residential neighborhoods in Carpinteria and Buellton has been a theme of countless county hearings during the past five years.

“The bad actors are giving us a bad name,” Nelson said. “There’s not peace out there. There’s a lot of concern, and we want to tackle that.”

Hartmann, who represents the wine country west of Buellton, where outdoor cannabis has taken root, and who came up with the idea of a hybrid cultivation tax, said, “For the moment, this is on pause. It was a huge investment and very educational for all of us.”

Hanging over Tuesday’s discussion was the knowledge that in January 2025, the makeup of the board will change, with Carpinteria City Councilmmember Roy Lee replacing Williams, who represents the Carpinteria Valley and eastern Santa Barbara. Williams, like Lee, lives in Carpinteria, but he narrowly lost re-election this March, at least in part because of the unpopularity of his cannabis policies in the hometown they share.

After Tuesday’s hearing, Capps, who represents portions of the Goleta Valley and Santa Barbara, said there would be “new dynamics and more opportunities” once the new board is in place. Cannabis taxes will come up again, she said, adding: “I don’t feel satisfied. The original intent of the cannabis program was to bring money into the county for the public good, for libraries and parks and combating climate change. I don’t want to lose sight of that goal.”

Melinda Burns is an investigative journalist with 40 years of experience covering immigration, water, science, and the environment. As a community service, she offers her reports to multiple publications in Santa Barbara County, at the same time, for free.