Santa Barbara County looking into changing cannabis taxes, raising sales tax

County Reporter/Associate Editor

Santa Barbara County staff will dive deeper into potential changes to how cannabis operations are taxed and will look at options for polling residents about increasing the local sales tax increment and possibly adding a parcel tax to solve libraries’ chronic funding shortfall.

The poll also may ask residents in the debris-flow-prone Montecito area about increasing Flood Control District assessments to pay for drainage and stormwater retention improvements.

Direction to look into potentially placing the taxes before voters, probably in the November 2024 General Election, were informally given to staff Friday in the last of three workshops on preparing the recommended 2023-24 fiscal year budget.

Cannabis taxes and potential revenue tax measures were the subjects of two special issue presentations Friday.

While the county’s financial condition for the upcoming fiscal year is stable, revenue for the next two fiscal years could come up short, which could result in service-level reductions and, potentially, layoffs or other measures to balance the budgets.

So the county is looking at ways to prepare for potential shortfalls in advance.

While cannabis tax revenues performed above expectations for the first few years, they’ve taken a nosedive in the last couple of years as excess product has flooded a market where legitimate operators struggle to compete against black market sellers.

The state and counties alike have been criticized for overtaxing a fledgling legal industry where wholesale prices have plummeted and undercapitalized small growers are being squeezed out.

In turn, the depressed market has led to the drop in tax revenues for the county to the extent that staff recommended “swapping out” cannabis tax revenue currently used for ongoing and one-time costs for General Fund contributions totaling about $7 million in order to keep those programs operating.

Supervisors supported the swap.

“This is a very prudent way of kind of course correcting,” 2nd District Supervisor Laura Capps said, adding it would also assure the public those programs funded by cannabis wouldn’t go away.

The staff also posed the potential of changing the way the county taxes cannabis, currently ranging from 1% of gross receipts for nursery and distributor operations to 6% of gross receipts for retail and microbusiness operations.

Cultivation, which has the most operators, is taxed at 4% of gross receipts, said Brittany Heaton, chief of the Cannabis Administration Division, who noted that while the current method accounts for market fluctuations, it is also complex and makes it difficult to project tax revenues.

An alternative would be to tax cultivation based on the square footage of the canopy, or growing area, which the board considered in May 2022 but rejected because there is no standard commodity price for cannabis.

A proposed schedule would tax indoor and mixed-light operations at 60 cents a square foot and outdoor cultivation at 30 cents a square foot, which based on current acreage could raise a little over $19.2 million per year.

“It’s unlikely that our county would receive revenues at this level initially, since, you may know, if we transition the tax, the tax burden could affect the ability of our current operators, or our prospective operators, that are within the (acreage) cap to remain viable because they built their business plan on our current system,” Heaton said. “And so there’d be a readjustment, and we’d have to look at where we landed.”

She noted the average large outdoor cultivation operation in the county is about 60 acres, which would face an annual tax burden of $588,000, while the average mid-size 25-acre operation would have a $245,000 annual tax burden.

Joe Armendariz, the only member of the public to comment during the hearing, said the county should not tax the industry at the level it does today and should only levy enough taxes to pay for regulating the industry.

He recommended the county impose a cannabis tax holiday “frankly, I think, to help the industry recover, to help the industry compete against the illegal market.”

“You have to do something with the cost of operating, and I think the tax scheme that we have is the obvious issue here,” Armendariz said, later adding, “To raise or even contemplate raising taxes on our beleaguered cannabis industry, I think, would be counterproductive in ways that frankly go beyond my ability to describe it.”

In a separate report, Assistant County Executive Officer Nancy Anderson described two other revenue tax measures — increasing the local increment of the sales tax and a flood control assessment on properties in the Montecito area.

The current sales tax for the unincorporated area of the county is 7.75%, of which the state takes 6% and the county gets 1%.

Increasing the local increment by 0.25%, 0.50%, 0.75% and 1% could generate $3.77 million, $7.54 million, $11.31 million and $15.08 million, respectively.

Raising the local increment by 1% would bring the county sales tax rate in line with those of Guadalupe, Lompoc and Solvang, where in the last three years voters approved raising their rates to 8.75%.

Third District Supervisor Bob Nelson, who noted he is “not a big tax guy to begin with” and that his “constituency has a lot of heartburn about additional taxes,” said he represents six unincorporated communities that are urbanized areas and should be treated as such.

“It’s going to be a hard sell to unincorporated residents to ask for additional money and then spread [spending] that out throughout the rest of the county, especially when a lot of them don’t feel they’re getting the services that they may feel they deserve as being in an urban area,” Nelson said.

He said the county needs to be more creative about increasing tax revenues through more relaxed permit processes to increase industrial and commercial development.

“This is why we poll, is to see whether [the vote] should be countywide or unincorporated [areas only],” Board Chairman and 1st District Supervisor Das Williams said. “The electorate is different, and we should look at the data.”

Williams threw a curve ball at the end of the discussion by saying the county ad hoc library committee has been pushing for a parcel tax to provide a stable revenue for county libraries.

He suggested that such a tax could be included in a poll seeking public opinion on the cannabis and sales taxes and Montecito property assessments.

County Reporter/Associate Editor