Declining cannabis prices drive proposal to reduce Sonoma County cultivation tax

Reduced tax rates may be in store for struggling cannabis cultivators and manufacturers in unincorporated Sonoma County, driven in part by decreasing prices affecting the industry.

County officials on Tuesday will recommend the Board of Supervisors approve new tax rates based on a model that would reduce the tax burden for most cannabis growers.

Under the proposal, cultivation tax rates would be reduced from $0.75 per square foot to $0.69 per square foot for outdoor cultivation, $3 per square foot to $2.51 per square foot for mixed light cultivation and $12.50 per square foot to $7.58 for indoor cultivation.

The tax rate for manufacturers would also drop from 3% to 1.5%, while retailers would see an increase from 2% to 3%.

The proposed changes come as the county sees a decline in the number of cultivators, dwindling prices driven in part by a glut of product and competition from large-scale growers and a projected long-term decrease in industry-driven revenue for its cannabis program.

“The reason for the revised tax rate is to remain responsive to market changes and whatever those market changes entail,” said McCall Miller, the county’s cannabis program coordinator.

The county’s cannabis tax revenue is projected to decrease from $1.6 million this fiscal year, to $1.4 million in fiscal year 2024-2025.

Factoring in departmental costs, the county’s long-awaited environmental impact study, launched in mid-2021 to streamline permitting and other costs, the program’s end balance is expected to decrease from around $3.7 million this fiscal year to about $2 million by fiscal year 2026-27, according to a staff presentation.

In light of those declining funds, departments are adjusting staffing and how they use the funds available in the program, Miller said.

The industry has struggled to compete with the illicit cannabis market that has undercut legal cultivators in price and fueled the supply glut.

The recommended tax rate changes are based the results of an annual analysis completed by HdL Companies, a consultant based in Brea, California.

The review found that the average price per pound for indoor cannabis decreased dramatically from $1,230 in 2023 to $606. The change in price is likely connected to large operations undercutting smaller operations, Miller said.

The study also found the average price for outdoor cannabis products decreased from $308 to $277, according to a staff report.

The proposal comes after the state in 2022 eliminated its cultivation tax for growers. Sonoma County in 2023 also revised its tax rates, reducing the rate for outdoor growers, but raising it for indoor cultivation.

The moves came under mounting pressure from cannabis industry representatives, who pressed for greater relief from taxes and fees they said were squeezing smaller operators out of business or into the illicit market.

Still, Sonoma County is seeing a decline in cannabis cultivators, Miller said.

There are five manufacturers, six retailers and 75 cannabis cultivators in unincorporated Sonoma County, according to Miller.

In May 2023, there were 155 cultivators operating in unincorporated Sonoma County.

Dropping prices may be one of the factors driving out cultivators, Miller said. But, she added that some cultivators have also said the county’s permitting process and backlog of applications is another factor.

“We’ve been told by operators that it’s easier in other places,” Miller said.

She could not confirm the number of applications in the backlog by deadline Monday.

You can reach Staff Writer Emma Murphy at 707-521-5228 or emma.murphy@pressdemocrat.com. On Twitter @MurphReports.

EDITOR’S NOTE: This story has been updated to correct the tax rate cannabis manufacturers currently pay, which is 3%. The proposed change would drop the rate to 1.5%.