Taxpayers should not be forced to subsidize the Cannabis Industry

Recently, the cannabis industry has been lobbying the state and county for tax reductions. They claim the recent drop in prices make cultivation and manufacturing taxes unaffordable. Before granting tax relief, let’s review how the industry arrived at this point, the real problem and if county tax relief is the right solution.

Proposition 64’s selling points were to legalize and grow the cannabis market, and lower cannabis prices to benefit consumers. This, along with Sonoma County’s voter initiative, promised that taxes would not just pay for the program itself but they would be sufficient to offset the secondary impacts of cannabis use with tax revenue spent on drug treatment, law enforcement, safety and youth programs and environmental protection. The county set the tax rate relatively low and now there is serious doubt that the program costs are covered, let alone these secondary impacts.

Although the legalization process had a slow start, California now has over 9,400 licensed cultivators. A recent Department of Cannabis Control (DCC) report indicates legal growers have doubled their output, while retail sales growth is slowing.

A Cannabis Growers Alliance representative attributed the dramatic fall in price to massive overproduction, “…California farmers are producing four to five times more cannabis than our legal market can consume,” …. “Simple supply and demand economics demonstrates when your supply outpaces your demand, the prices go down….”

By the industry’s own admission, they are victims of their own success. 2020 was a bumper year, prices up, sales up — not a peep about taxes. For 2021 cultivators assumed the same growth rate and accordingly increased production. All the while the market was softening. This is a normal business cycle; cannabis cultivation overshot the distributor market and faces lower prices.

Now the industry is pressuring our Senator and Supervisors for special treatment in the form of tax relief. However, typical market forces of over-supply cannot be deemed a “disaster” (such as fire damage requiring tax relief) or used to justify an urgency ordinance, which requires a finding of impacts to “…peace, health or public safety.”

Our Senator Mike McGuire justifies tax relief to help “the small family farmer.” However, a review of the cannabis permits revealed that the government’s actions and inactions, not taxes, are creating problems for the small cultivator. First, the county fast-tracked over 100 low-cost permits for 10,000 sq. ft. cultivations. Analyses revealed that two large cannabis operators and their affiliates own 70% of these permits. Then, the county granted 5-year extensions thereby, providing competitive advantage to these large operators.

Permitted cannabis operations are also impacted by illegal grows. There has been little concerted effort by the state or county to reel in unpermitted growers or illegal cannabis. Again, over- supply depresses market prices.

On Jan. 4, the Supervisors requested more complete financial information that covers all revenue sources – permits, taxes, penalties and fines - and all program direct and indirect costs. The economic analyses must include the long-term public costs of enforcement, environmental remediation for abandoned cannabis sites and eradication of illegal grows. The costs to bring the cannabis program into compliance with state environmental law and properly integrate within our county must be considered.

The growers face a supply/demand problem, not a tax problem. Our government officials need to give up popular sound bites and do the serious work of closing large corporation permitting loopholes and eliminating unpermitted grows. Cannabis taxes are the price of legitimizing the industry. Lowering taxes effectively means taxpayers will be subsidizing this industry.