CPI-adjusted increases to the Measure S cannabis tax

(Updated Sept. 17)

Dear Supervisors,

Thank you for your consideration on the issue of CPI-adjusted increases to the Measure S cannabis tax.

Like other businesses, Humboldt cannabis businesses have been impacted by economic fallout surrounding the COVID-19 pandemic. However, cannabis businesses are also unique in that we have been subject to several tax increases over the past year that are specific to our already highly-taxed industry. These include increases to the state cultivation tax, an increase of the state wholesale mark-up rate from 60% to 80%, as well as the Measure S CPI increase before you today.

In addition, in response to the COVID-19 pandemic, the County has chosen to postpone reinvesting the bulk of this year’s Project Trellis funds. These funds were derived from a portion of Humboldt cannabis tax revenue and were previously earmarked for reinvestment into the Humboldt cannabis industry.

In light of these challenges, we feel the conversation on Humboldt’s local cannabis taxation, and the question of a CPI-adjusted increase in particular, is a timely one.

We would like to note that, over the past several months, COVID-19 has resulted in a historic collapse in the CPI. In April 2020, the nationwide CPI decreased by 0.8%, the largest decline since the housing crisis in 2008. In May 2020, core CPI decreased for the third month in a row, the first time that this has happened since 1957. We cannot support inflation-adjusted tax increases during a period of historic deflation. Specifically, we would like to make two recommendations regarding the proposed CPI increases.

First, we strongly recommend that any past, present, or future CPI increase should be tied to the nationwide CPI rate, as required by Measure S. The text of Measure S explicitly specifies that any inflation-adjusted increase must be calculated based on the nationwide CPI increase for “all urban consumers.” This rate, according to the U.S. Bureau of Labor Statistics, was about 2% for the previous year. However, in calculating the Measure S CPI increase, the staff report confirms that staff used the CPI increase specific to the Bay Area metro area, where the rate of increase is 4%. Setting aside that Humboldt County is not in the Bay Area, it seems clear to us that using the Bay Area rate rather than the nationwide rate is in direct contradiction to the text of Measure S. The staff recommendations before you do not include an option to recalculate the CPI increase using the correct nationwide rate, but we feel this is a minimum action the Board should take to remain in compliance with Measure S.

Second, as discussed in the staff report, we support suspending the Measure S CPI increase for the coming year as well as providing a credit to refund the 2019 CPI increase. We are extremely optimistic about the long-term potential that Humboldt County’s small and independent local cannabis businesses hold for the economic vitality of the County as a whole. However, in an industry that currently lacks access to capital, banking, and national markets, and that struggles with uniquely high compliance costs and taxes, the challenge is to ensure that as many businesses as possible survive until our industry can reach a point of greater stability. In light of the challenging circumstances described above, a suspension of the CPI increase would help support those businesses experiencing the greatest cash flow challenges. Additionally, considering that previous CPI increases used the incorrect Bay Area rate of 4% rather than the correct nationwide rate of 2%, we believe a credit to refund the previous years’ CPI increase would be an appropriate response.

Thank you for your consideration,

Ross Gordon

Policy Director

Humboldt County Growers Alliance

Sources Cited:

1. https://mjbizdaily.com/california-marijuana-taxes-will-increase-new-years-day/
2. https://www.reuters.com/article/us-usa-economy-inflation/coronavirus-crisis-leads-to-largest-us-consumer-price-decline-since-2008-idUSKBN22O1WP
3. https://www.marketwatch.com/story/consumer-prices-fall-again-cpi-shows-as-coronavirus-reduces-the-rate-of-inflation-to-near-zero-2020-06-10
4. https://humboldt.county.codes/Code/719-5