Adopt resolution setting the fiscal year 2023-24 Cannabis Tax rate at four percent (4%) of gross receipts on commercial cannabis cultivation and five percent (5%) on all other cannabis businesses; or alternatively, adopt resolution setting the fiscal year 2023-24 Cannabis Tax rate at two percent (2%) of gross receipts on commercial cannabis cultivation and five percent (5%) on all other cannabis businesses. (No general fund impact) (Rinde/Haynes) (Est. Time: 5 min)

Adopt resolution (Attachment A) setting the fiscal year 2023-24 Cannabis Tax rate at four percent (4%) of gross receipts on commercial cannabis cultivation and five percent (5%) on all other cannabis businesses. 

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.

Due to the ongoing development of the Comprehensive Land Use Ordinance (CLUO) and the desire to provide stability for the fledgling industry, the Board acted to keep the tax rate for cultivation at 4% in fiscal years 2020-21 and 2021-22. In May 2022, staff presented to the Board a recommendation to again keep the cannabis tax rates at 4% for cultivation and 5% for all other cannabis businesses for fiscal year 2022-23. Due to challenges within the cannabis industry, some Board members expressed interest in lowering the tax rate for cultivation; however, a consensus was not reached, and no action was taken, thereby leaving cannabis tax rates unchanged from the prior year. 

Cannabis Tax Revenue
Revenue from the County’s cannabis tax is general revenue that may be spent on unrestricted general government purposes at the Board’s discretion. After going into effect in July 2018, cannabis tax revenue quickly increased to over $2 million per year in fiscal years 2019-20 and 2020-21. However, tax revenues began to decline markedly in fiscal year 2021-22 due to a drop in wholesale cannabis prices and fewer cultivators being licensed. Revenues are projected to decline again in the current fiscal year, as reflected in the table below.

As illustrated in the table above, projected cannabis tax revenues in 2022-23 reflect more than an 80% reduction from the peak in 2019-20. While this decline is largely attributable to an industry-wide drop in wholesale cannabis prices and fewer licensed cultivators in Yolo County, it is also imperative that the County ensure that all taxes owed are being paid. To this end, the Department of Financial Services is evaluating options for using a third-party firm to complete three to five in-depth audits of licensed cultivators per year. Should positive results be obtained in 2023-24, this program would be considered on a rotational basis in subsequent years. 

Cannabis Tax Expenditure Plan
While revenue from the County’s cannabis tax is general revenue, the ordinance included advisory language that specified certain potential uses, including criminal enforcement of illegal cultivation, early childhood intervention and prevention, youth development, and rural infrastructure and programs. The ordinance also created a citizen’s oversight committee to review expenditures of tax revenues.

Additionally, in January 2019, the Board adopted a Cannabis Tax Expenditure Plan Framework that reiterated the eligible uses enumerated in the ordinance and expanded the funding priorities to include County administrative costs and financial sustainability efforts. The Expenditure Plan Framework also specified, among other things, that cannabis tax funds should only be programmed for expenditure once received, and that staff would seek input from the citizen’s oversight committee as part of the development of the annual expenditure plan.

Since going into effect in July 2018, cannabis tax revenues have 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, with the decline in tax revenues over the past several years, the cannabis tax expenditure plan has been reduced in scope. Attachment C provides a summary of the cannabis tax expenditure plans from 2019-20 to 2022-23.  

The draft cannabis tax expenditure plan for 2023-24 was discussed with the Cannabis Ad Hoc Subcommittee on May 17 and will be presented to the citizen’s oversight committee in late May or early June. The plan will be brought forward for Board consideration as part of the 2023-24 Recommended Budget hearing on June 13.

2023-24 Tax Rates
Staff recommend that the Board adopt the resolution included as Attachment A to set the cannabis tax rates for 2023-24 at 4% of gross receipts for commercial cannabis cultivation and 5% of gross receipts for all other cannabis businesses, unchanged from the current year. 

Staff acknowledge the challenges that continue to face the legalized cannabis industry in California. In particular, the industry has experienced an over-supply of cannabis, which has driven wholesale prices down, and has continued to be subject to illicit product entering the marketplace. In addition, excessive taxation is often cited as a continuing challenge for the industry. While the state cultivation tax was eliminated as of July 1, 2022, cannabis sales are still subject to a 15% state excise tax in addition to the standard sales and use tax.

Notwithstanding these ongoing challenges, staff recommend keeping the Yolo County cannabis tax rates at the existing levels of 4% for cultivation and 5% for all other businesses. Yolo County tax rates are already relatively low compared to other jurisdictions, and the County has already taken action to prevent the automatic increase in the cultivation rate as provided for in the tax measure. In addition, the challenges facing the legal cannabis market in California are structural in nature, and it is unlikely that a modest tax reduction at the local level will provide significant relief or financial sustainability in the face of broader, industry-wide challenges. Finally, reducing tax rates would further reduce the funding that is available for Yolo County programs and services.

Alternatively, should the Board desire to implement a reduced tax rate at this time, the alternate resolution included as Attachment B would set the 2023-24 tax rate at 2% for commercial cannabis cultivation and 5% for all other businesses. This alternative would provide the maximum tax relief to current Yolo County cultivators allowed under the cannabis ordinance. If approved, it is estimated that this option would result in reduced cannabis tax revenue of approximately $200,000.

The Department of Financial Services has worked collaboratively with the County Administrator's Office in developing the proposed 2023-24 Cannabis Tax Expenditure Plan, which was presented to the Cannabis Ad Hoc Subcommittee on May 15th and will be presented to the Citizen's Oversight Committee in late May or early June.