Cannabis Tax Reform Limps to an Uncertain Finish Line

As the county supervisors prepare to vote next week whether to propose a cannabis tax increase for the November ballot, they are facing a dilemma largely of their own making — the unintended consequences of promoting a “Green Rush” in Santa Barbara County.

A glut on the market in California, fueled in part by over-production in the North County and Carpinteria Valley, has caused prices for cannabis to plunge by roughly half since 2021. Cannabis tax revenues have declined, too, even as the county has approved zoning permits for 1,760 acres of legal cultivation, more than anywhere else in the state. A thriving illegal market also has depressed the price of pot.

On Tuesday, the supervisors will wrestle with how and whether to initiate a cannabis tax measure that can at least ensure that the county continues to break even. It costs nearly $5 million yearly to administer the cannabis program and go after illegal operators. For more than two years, the board has pondered how best to bring in more revenue without putting growers out of business. Many have already quit.

The supervisors also want to address the glaring tax disparity between indoor and outdoor growers. During the 2022-23 fiscal year, county records show, the indoor, or greenhouse operators of the Carpinteria Valley paid $4.5 million in cannabis cultivation taxes, or 82 percent of the $5.5 million collected by the county; while the outdoor growers of the North County paid only $993,000, or 18 percent.

At a May 14 board hearing on cannabis taxes, Supervisor Joan Hartmann, who represents the Santa Ynez Valley and the wine country west of Buellton, where cannabis has taken root, questioned whether the county was recovering its costs for outdoor cannabis. The county’s cannabis ordinance allows up to 1,575 acres of the outdoor crop under hoops and in open fields, most of it in the North County.

“Is the juice worth the squeeze on that?” Hartmann asked, noting that her constituents have long complained about the “skunky” smell of pot during harvest time. “Is this generating enough revenue to make it worth our while?”

A hybrid tax option

In 2018, county voters set the cannabis cultivation tax at 4 percent of growers’ gross receipts, or sales. But the board has learned that some outdoor growers are gaming the system: They’re under-reporting their gross sales by selling cannabis to themselves at lower-than-market prices.

A hybrid tax option on the table for Tuesday’s hearing, recommended by the County Executive Office (CEO), attempts to address the under-reporting and create more parity in the system. It would assess 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 is greater. Growers who are not cultivating would continue to pay no taxes.

The CEO said an additional analyst would be needed to administer the hybrid tax, if it is approved. That would cost an additional $175,000, the report shows, on top of $135,000 for cannabis audits and $481,000 for tax collection already budgeted for the coming fiscal year.

“We’re no longer aiming to pay for parks and climate change and libraries,” Supervisor Laura Capps, who represents portions of the Goleta Valley and Santa Barbara, said at last month’s hearing. And she added, “Action is important …We’re not so confident that we’re getting much out of this industry.”

Hartmann said she was supportive of a hybrid tax — an idea she came up with — “because I’m really concerned about under-reporting.” Bob Nelson, who represents Orcutt, Los Alamos, and eastern Santa Maria, agreed, saying, “There’s inequities out there … We just want real parity.”

Tuesday is the last chance for the board to place a cannabis tax measure on the November ballot. But it would take four out of five votes; and Board Chair Steve Lavagnino, who represents Santa Maria, has made it clear he’s not in favor.

“It’s so frickin’ complicated,” he told his colleagues last month. “… Either kill it or come up with something better. We’re just picking numbers right now.”

Lavagnino does, however, support an increase in the hotel “bed tax” in the county’s search for more revenue. On June 4, the board initiated a measure for the November ballot that would increase the bed tax from 12 to 14 percent in unincorporated areas. Placing a cannabis tax measure on the same ballot “would not make sense,” Lavagnino said.

That leaves Supervisor Das Williams, who represents the Carpinteria Valley and eastern Santa Barbara, and, together with Lavagnino, was a co-architect of the county’s 2018 cannabis ordinance.

In an interview this week, Williams, who recently lost re-election — at least in part because of his unpopular cannabis policies — said he was “most interested” in enforcing the existing cannabis tax rules to “make sure everybody’s paying their fair share.” He expressed concern that putting two tax measures on the November ballot would turn off voters.

“I don’t think this is the best way to make more revenue,” Williams said of a hybrid tax, “but I’m trying to mull what’s best for compliance. I haven’t decided yet.”

The proposed increase in bed taxes is projected to increase county revenues by $2.9 million yearly. If the recommended hybrid cannabis tax option had been in place during the first three quarters of this fiscal year, it would have increased county tax revenues by $1.7 million, the CEO’s report shows.

Dropping out

Across the board, the growers have urged supervisors to stay the course with the current tax rules. A square footage tax would only drive more of them out of the county, they say.

Micah Anderson, founder and CEO of LEEF Holdings, one of the largest cannabis companies in California, was one grower who spoke out last month. Anderson was granted an over-the-counter zoning permit for SCRSB, 180 acres of cannabis at 100 Salisbury Canyon Rd. in the Cuyama Valley. Once up and running, it will be largest cannabis operation in the county.

Anderson told the supervisors he had invested four years and several millions of dollars to “get to the starting line” with a cannabis extraction business that requires “many acres of cultivation.” A square-footage tax, he said, “could put us at a disadvantage.” At 10 cents per square foot under a hybrid option, Anderson would owe at least $800,000 in taxes for every quarter in which he sold or processed cannabis.

Outdoor cannabis growers can count on only one or two harvests per year, at most; and their lower-value crop, called “fresh plant,” gets plowed into the manufacture of cannabis oils, edibles, vapes and other products. In greenhouses, by contrast, the harvest is continuous and the marijuana, called “fresh flower,” can be sold at a premium.

Of the 1,575 acres allowed by the county for outdoor cannabis cultivation, 730 acres have fallen out since early 2022, or nearly half, county records show. New growers, including Anderson, have stepped in to “backfill” some of that acreage, but 335 acres remain unclaimed today under the outdoor cap. There are no growers on the waiting list.

The growers of 31 outdoor operations, large and small, from Santa Ynez to the Cuyama Valley never got their business licenses; or they let them expire, or they missed the deadline and had to shut down, records show. Some never got plants into the ground.

The 31 who have dropped out, permanently or not, include Sara Rotman, who failed to renew her county business license in January 2022 and stopped growing cannabis at Busy Bee’s Organics, 22 acres of cannabis at 1180 W. Highway 246 west of Buellton; and Thomas Martin, CEO of Central Coast Agriculture, who failed to renew his license for 24 acres of cannabis at 5645 Santa Rosa Rd. in March of this year.

In 2020, the Santa Barbara Coalition for Responsible Cannabis, a countywide group that has sought stronger regulations for the industry, filed a high-profile lawsuit against Rotman and the county, alleging that Rotman had illegally expanded her cannabis operation. The court upheld her zoning permit.

Martin was in the news this month after he paid a $1.3 million penalty to the county for clean air violations at the company’s cannabis manufacturing operation in Lompoc.

Larger “grows” that have dropped off the county’s eligibility list include SBC Farms, 167 acres at 1150 Foothill Road in the Cuyama Valley; SFS Farms OPCo 1, 87 acres at 4874 Hapgood Road west of Buellton; WTMCA, 63 acres at 3700 Telephone Rd. in the Santa Maria Valley; and Stateside Greens, 36 acres at 3851 Telephone Road in the Santa Maria Valley.

Since cannabis zoning permits run with the land, they could be used in the future by the same owners or new owners, provided the owners apply for a county business license and there is still room under the acreage caps.

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.