Cannabis Revenues Disappoint
At a SB County Board of Supervisors hearing this past Tuesday, the board was briefed on second-quarter revenues for Fiscal Year 2022-23 related to cannabis tax revenue, which continues to trend lower than budgeted with a projected $10.5M negative variance.
With an adopted budget of $16.3M, cannabis cultivation and retail storefront tax is currently projecting $5.7M in revenue, which is roughly a $10.5M deficit. According to County staff, this projected decrease is due to a decline in cultivation tax due to the oversupply of wholesale cannabis, as well as an increase in the number of cultivators withdrawing from the County’s cannabis program and electing not to grow, mostly due to market conditions. Price per pound has dropped by 35-40 percent on average from 21/22 to 22/23, according to staff.
Taxes from retail storefronts are also projecting lower than budgeted due to lengthened entitlement and business licensing processes. As of press time, two storefronts – one in Carpinteria and one in Isla Vista – are currently operational in the County, and four more – including one in Orcutt and one in Eastern Goleta – are in the pipeline.
During the second quarter, which ended Dec. 31, 2022, the County collected $1.1M in cannabis gross-tax receipts. On Tuesday, Brittany Heaton, CEO Cannabis Administration Division, reported to the board that that number had grown to $3.5M as of Tuesday. There are currently 76 active cannabis business licenses in the County.
Heaton reported that attrition has contributed to the lack of revenue, and 12 cannabis operators have dropped out of the program for various reasons including compliance issues, lack of capital, and stringent board policies which have rendered some operators ineligible to participate in the cannabis program. The County’s program, which was implemented five years ago, costs nearly $5M per year to run, with 30 employees paid for roles in the permitting, administration and licensing, and compliance/enforcement.
Second District Supervisor Laura Capps, who vowed to make significant changes to the County’s cannabis program once elected to the board, asked a number of questions of County staff, honing in on what she considers the most significant issue: There are a number of cannabis operators who are not paying taxes. “It’s been an ongoing problem, and it still hasn’t changed,” she told us after the hearing. “Now that we know that the revenue was way down, and we know that one factor is because people aren’t paying their taxes, we need to tighten the rules,” she said. “I would like to see more stringent compliance.” Capps also questioned the need for 30 employees as part of the program.
“Yes, revenue is down … we are seeing a lull in the tax revenue, but it’s not a reason to throw the baby out with the bathwater,” said Fifth District Supervisor Steve Lavagnino, adding that at one point the cannabis revenue source was nearly as strong as Transient Occupancy Tax (TOT), bringing in $15.7M in the 20/21 Fiscal Year. “The cannabis program is much more complicated than anyone anticipated,” added First District Supervisor Das Williams, who also noted that the illegal side of the cannabis market is constantly evolving, with illegal growers now growing indoors, which is harder to detect. Street-level dealers also contribute to the problem, Supervisor Williams said.
While cannabis revenue is down, the County’s General Fund is projecting a net positive variance of $28.5M compared to the adopted budget, due to greater property tax revenues than budgeted because of a more active-than-normal real estate market. A high volume of property ownership changes occurred over the past two years, and those properties were reassessed upon property transfer; property values increased significantly. Transient Occupancy Tax revenue is also up $2.2M, despite the continued closure of the Biltmore Hotel, which used to be one of the County’s largest TOT contributors.