Adopt resolution setting the fiscal year 2022-23 Cannabis Tax rate at 4 percent of gross receipts on commercial cannabis cultivation and 5 percent on all other cannabis businesses; and direct staff to send a letter in support of the Governor's proposal to eliminate the state cannabis cultivation tax as included in the May Revise. (No general fund impact) (Haynes)

Cannabis Tax Background
In June 2018 Yolo County voters approved Measure K, levying a tax on cannabis businesses in the unincorporated area of the county. The tax rate was authorized at a rate of between 1% - 15% of gross receipts, with an initial rate of 4% for cultivation and 5% for all other cannabis businesses.
 
The ordinance approved by Measure K set the initial tax rates for a period of two fiscal years, from July 1, 2018 to June 30, 2020, at which point the tax rate on cannabis cultivation would automatically increase to 5% unless the Board of Supervisors approved an action otherwise.  The ordinance also allows the Board to increase or decrease the cannabis tax rate or establish differing tax rates for different categories of cannabis business, provided that the tax rates are not changed more than once in a 12-month period and are not increased or decreased by more than two percentage points.
 
In April 2020, the Board took action to maintain the tax at 4% for cultivation and 5% for other cannabis businesses for fiscal year 2020-21 due to the ongoing development of the Comprehensive Land Use Ordinance (CLUO) and the desire to provide stability to the local cannabis industry. In March 2021, the Board again took action to maintain the tax rates for 2021-22 while the CLUO process was finalized.
 
Cannabis Tax Expenditure Plan
Revenue from the County’s cannabis tax is general revenue that may be spent on unrestricted general government purposes at the Board’s discretion. The ordinance stated this, but also included advisory language that specified certain potential uses, including criminal enforcement of illegal cultivation, early childhood intervention and prevention, youth development, substance abuse education and treatment, rural infrastructure and programs, and cannabis research.  The ordinance also created a citizen’s oversight committee to review expenditures of tax revenues.
 
Since going into effect in July 2018 the cannabis tax has provided a steady stream of revenue that has allowed the County to make substantial investments in a variety of areas including illegal cannabis enforcement, child and youth programs, and rural community programs and infrastructure. However, cannabis tax receipts have fallen sharply in the current fiscal year.  Through the first three quarters of 2021-22, cannabis tax receipts have totaled just $791,000 compared to $1.6 million in the prior year, a decline of approximately 50%. If this trend continues, current year receipts are projected to total only $1.0 million.

The cannabis tax expenditure plan for 2022-23 was presented to the citizen’s oversight committee on May 19^th and will be brought forward for Board consideration as part of the 2022-23 Recommended Budget hearing on June 14^th.
 
Industry Challenges
Over the past several months staff have heard from industry participants and other sources regarding challenges facing the cannabis industry in California. Some primary concerns include illegal product continuing to enter the market, declining wholesale prices, limited retail opportunities, and excessive taxation. In addition to local taxes, the State of California imposes an excise tax on the retail sale of cannabis products at a rate of 15%, and a cultivation tax on all harvested cannabis that enters the commercial market at a rate of $10.08 per ounce ($161.28 per pound) of dry-weight flower and $3.00 per ounce ($36.00 per pound) of dry-weight leaves or trim . Standard sales and use taxes are also applied on retail sales of cannabis. 
 
The Governor’s May Revise recognized the complex and burdensome cannabis tax framework that disproportionately impacts cultivators and proposes to eliminate the state cultivation tax beginning July 1, 2022. 

The Governor’s proposal to eliminate the state cultivation tax would provide substantial relief to local cannabis cultivators. As shown in the examples above, the State taxes can be approximately 15-20 times more onerous than the County's local tax depending on the wholesale price of cannabis. As such, it is also recommended that the Board direct staff to send a letter in support of the Governor’s proposal to eliminate the state cannabis cultivation tax.  Leaving Yolo County’s tax rates unchanged at this time provides the County flexibility to consider a reduced tax rate at a later point if state tax reform does not materialize. 

Staff from the Department of Financial Services worked closely with the County Administrator's Office, County Counsel and the Department of Community Services. This issue was discussed with the Cannabis Regulatory Ad-Hoc Subcommittee on March 1, 2022 and presented to the Citizen's Oversight Committee on May 19, 2022. In addition, Yolo County is a member of the California Cannabis Authority, which has begun to examine industry challenges and monitor legislation that would support the legal cannabis market in California.