Cannabis economics of Sonoma County

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Dear Neighbors,

Our latest newsletter exposes the fact that the county's cannabis program is running in the red and will need to be subsidized by FY 28-29.  That's far from the promises made by our supervisors.

Financial Review of Sonoma County’s Cannabis Program

Broken promises:
In 2017 the Board of Supervisors (BOS) promoted Measure A, the cannabis tax measure legalizing commercial cannabis in Sonoma County, with the promise “to fund essential county services such as addressing industry impacts, public safety, fire, health, housing, roads, and environmental protection”.  After 5 years, no tax money has been provided to fund these essential county services, not a single dollar has gone into the General Fund.  
Then in 2021, in response to pressure from cannabis growers, the BOS reduced the cannabis cultivation tax by 45%.  Now, the cannabis program doesn’t generate enough money to pay for itself, let alone do what was promised to the voters.  Despite the supervisor’s promises that Measure A would generate needed tax revenue for county programs - "Pot for Potholes" - now the county finds itself having to subsidize the cannabis industry long term.  The current positive fund balance will be used up in a few years, at which point the General Fund monies will be required to subsidize this program.
The same economics are now playing out at the State level.  Proposition 64 was sold to the voters as a tax windfall, designed to generate revenue from cannabis taxes for drug research, treatment, law enforcement, health and safety grants, youth programs and preventing environmental damage.  In 2021, the State's cultivation tax was cancelled, which eliminated the funding source that supported child/youth services. Over 100 child/youth advocate groups seeing their programs in jeopardy cried out to the legislators, who then agreed to backfill this funding with General Fund monies.  With California facing a significant deficit, these child/youth programs are again at risk.

Cannabis industry passing the blame (and buck):
The “Industry” claims that the problems are taxes, regulations, and the illegal market, rather than these growers oversupplying the market, thereby driving down prices.  During the first few years after legalization, the growers first to market enjoyed high prices, high profits and paid their taxes without complaint.  What has transpired in the last few years are the normal growing pains of any new industry.  Many more growers entered the market, growing significantly more cannabis, at significantly lower prices, and supplying both the legal and illegal markets. Moreover, during this time, their taxes have decreased.  This competition has exposed the inefficient growers.

Independent analysis confirms the real problem:
These problems were highlighted by the consultant HdL, hired by our BOS to help them establish a new tax plan.  Looking at the larger California market HdL’s report pointed out:

• "The cannabis cultivation market in California has far exceeded its saturation point and that there is not enough room for those growers already licensed, much less new entrants...."
• “The 20 largest cultivators in California are capable of producing over 2.6 million pounds of cannabis per year, which is more than enough to supply the entire statewide demand.”  (There are over 8K cultivators)
• "Outdoor cultivation has struggled to find a place in the cannabis market. Many outdoor cultivators have been unable to sell their product at all."
• "Any change to the basis or rate of the county’s cultivation tax is unlikely to make a difference in which businesses succeed or fail.  The current reduced tax rates are on par with or below common tax rates found elsewhere in the state, including Santa Barbara County and Ventura County, which are both home to some of the largest operators in the state. These businesses appear to be operating comfortably and out competing growers from elsewhere in the state despite a somewhat higher tax burden. We believe that factors such as proximity to markets, cultivation infrastructure, operating efficiencies, producing under contract and distribution agreements are more indicative of business success than tax rates, alone".

Back to Sonoma County’s cannabis program finances:The County Cannabis program is not financially sustainable.  In Feb 2023, the County Controller report projected annual costs in the $2.3m-$2.5m range with tax revenues of $1.8m annually.  The fund balance will be depleted by FY 2027/2028.  That assumes the same level of growers and cannabis pricing which now is very questionable considering competition throughout the state and the latest tax revenue outlook:The current outlook for FY 2022/2023 confirms this troublesome trend:

• Revenue $1.4m, ~ $244K /15% below budget.
• Tax delinquencies of $205K, or 18% delinquency rate for the year.
• Cumulative tax delinquencies are $790K.  Collectability is highly questionable due to the corporate structure most growers have setup to avoid any personal liability.

What about the environment?:
During the 2021/2022 seasons, 26 operations (all multi-tenant) sought and received drought disaster relief from the Department of Cannabis Control, allowing the forgoing of tax payments, costing the County approximately $195K.   More important than the money, these growers’ own actions are an admission of an unsustainable environmental practice.   In the new era of water scarcity, the County should not be promoting a highly water intensive product, often grown near residential neighborhoods that rely on the same water table.
The economics of the industry has resulted in many failed operations (both legal and not) which have left a wake of environmental disasters (contamination, hazardous waste pesticides, fertilizer, rodenticides, gasoline from a generator, plastic irrigation lines, plastic fencing, water diversion, unsafe structures and electric, land grading).  In many cases the growers are long gone or bankrupt.  Our County was awarded a $3million Public Health and Safety Grant to help in these efforts.  Our local State Park District have hired staff and an Environmental Scientist for the Cannabis Watershed Protection Program, who have just began the long process of rehabilitating cannabis sites on our public parks.  These operators spent significant time and effort to make their profit.  Unfortunately, you and I, the taxpayers, will spend significantly more cleaning up their mess.

Where is the coverage in the Press Democrat?
The Press Democrat wrote one article on the cannabis tax reduction that omitted the negative economics detailed in the HdL report ("County considering changes to tax" - 2/28/23).  The Press Democrat elected to not publish at least three Letters to the Editor that exposed the damning fiscal analysis in the HdL report.
Given this analysis, why are we wasting County resources to subsidize a declining industry that's likely skirting taxes and won't generate enough tax revenue to cover the County's costs to manage it for years to come, if ever?  

Supporting the Public Good

We know from experience that the county often listens to the cannabis industry more than ordinary citizens. For this reason, it is important that a legal team, including technical experts, represent our interests throughout the entire revision process.  Protecting our neighborhoods from poorly planned cannabis operations comes at a cost. Please donate today to support this effort. You can also mail a check to:Sonoma Neighborhood Coalition PO Box 314Valley Ford, CA 94972

Let’s celebrate this incredible engagement from the citizens and fund legal support for our positions.

Thank you Neighborhood Coalition