Cannabis tax revenue doesn't meet Sonoma, Mendocino projections

Sonoma and Mendocino counties reduced their projections for cannabis tax revenues in the most recent fiscal year, after their forecasts missed the mark during the first year of state-regulated recreational sales.

In fiscal year 2018–2019, which closed June 30, Sonoma County collected $2.30 million in cannabis taxes, according to an email from Deputy County Administrator Niki Berrocal. The county has collected $5.70 million in total cannabis revenues from both fiscal 2017-18 and 2018-19.

California voters legalized cannabis for adult recreational use, effective Jan. 1, 2018. The types of cannabis businesses subject to taxation the county include cultivation operations, dispensaries, distributors, manufacturers, nurseries and testing labs.

Projections done in 2016 estimated the annual county-derived revenues from legalized cannabis in fiscal year 2017-18 at $6.3 million annually, according to a report to the Sonoma County Board of Supervisors.

'Staff estimates that revenue in (fiscal) 2017-18 at the proposed starting rates will total approximately $5 million annually from the cultivation tax. The manufacturing tax is estimated to bring in another $1.3 million, for a combined annual revenue of approximately $6.3 million,' the report said.

The county's most recent budget noted, 'Cannabis Program revenues are expected to cover expenses in FY 2018-2019 without dipping into the FY 2017- 2018 fund balance. However, this outlook may change due to possible revision of policies.'

Asked why annual revenues had fallen short of that projection, Berrocal wrote, 'There is a difference from projected to actual revenues due to the many contributing factors of bringing an unregulated market into regulation.'

For fiscal 2018-2019 the county projected $1.36 million in cannabis tax revenue, according to Hannah Euser at the Sonoma County Administrator's Office. But the actual take for the period was $2.30 million.

Asked to reconcile the difference, Euser said in another email, 'The cannabis program is still relatively new and the budget projections were conservative. There was also an increase in permitted operations in industrial zones over previous years.'

She also said the extension of the Penalty Relief Program brought in more revenue than what was projected. The program allows established cannabis businesses to continue to operate while in the permit process, without being subject to land use penalties, and as long as they adhere to certain criteria, including paying taxes.

State cannabis regulators appear to be partly to blame for the lag in bringing new, taxable cannabis businesses online, according to an audit by the California Department of Finance from July.

That report found the Bureau of Cannabis Control is authorized to hire 219 people, but had only filled 75 positions when the report was published.

The report also found that the bureau, one of three state agencies that regulates cannabis, 'does not have a comprehensive management strategy established and documented that identifies mission critical activities aligned with workload and available resources, or performance measures.'

Uneven enforcement and regulation has also led to a continually thriving market of unregulated, and therefor untaxed, cannabis, according to a state Cannabis Advisory Committee report on the first year of legal sales.

'The overarching reality after one year of legal cannabis sales is that the regulatory process to licensure insufficiently incentivizes unlicensed businesses to seek licensure and insufficiently de-incentivizes the illegal unlicensed underground market,' the report from earlier this year found.

MENDOCINO COUNTY: TAX REVENUES 'NOT MATERIALIZED'

Long been known for unregulated cannabis grows, began collecting a cannabis business tax on Jan. 1, 2017, according to Treasurer-Tax collector Shari Schapmire. That was before statewide legalization took effect but after California voters OK'd recreational cannabis on Nov. 8, 2016

From Jan. 1 to June 30, 2017, the county collected about $80,000 from cannabis dispensaries, Schapmire said. From July 1, 2017, to June 30, 2018, Mendocino County collected $1.3 million, while in the most recent July–June fiscal year, it took in $3.7 million.

She said those taxes included cannabis cultivators, dispensaries, facilities and other related businesses.

According to the county's most recent budget, 'cannabis business tax revenues originally intended for roads (have) not materialized.'

Schapmire was unsure how those numbers stacked up against projections and deferred to the most recent county budget.

'The new Cannabis Business Tax projection was reduced by 38.5% for (fiscal) 2018-19 to reflect the under realized cannabis revenues projected for (fiscal year) 2017-18 year-end close,' the 2018–2019 budget document said.

During a May 2017 budget workshop, the Mendocino County Board of Supervisors directed staff to focus projected cannabis tax revenue on funding cannabis enforcement efforts and support for roads.

Stumbling cannabis tax revenues have impacted not just the North Bay.

According to Capital Public Radio, Gov. Gavin Newsom's proposed budget projected $355 million and $514 million in tax revenues for fiscal years 2019 and 2020, respectively. In May those numbers were lowered from $288 million and $359 million.