Law and Legislation Committee
April 19, 2022

Economic & Planning Systems, Inc.T h e E c o n o m i c s o f L a n d U s e455 Capitol Mall, Suite 701 nSacramento, CA 95814916.649.8010 nwww.epsys.com SACRAMENTO COMPREHENSIVE CANNABIS STUDYLaw and Legislation Committee Study Session #3Economic Impacts, Fiscal Impacts, and TaxationApril 19, 2022 Economic & Planning Systems, Inc. (EPS) Law and Legislation Committee Study Session #2 | 1 OVERVIEW1. Economic Impacts2. City of Sacramento Fiscal Impacts3. Taxation Law and Legislation Committee Study Session #3Economic Impacts, Fiscal Impacts, and Taxation

ECONOMIC IMPACTS
Economic & Planning Systems, Inc. (EPS)EPS PPT Presentation | 3 ECONOMIC IMPACT ANALYSISMETHODOLOGYThis economic impact analysis estimates the quantifiable ongoing operational impacts of the cannabis industry, including direct, indirect, and induced impacts to the City and County through an industry contribution multiplier analysis.

DIRECT IMPACTS INDIRECT IMPACTS INDUCED IMPACTSOperating revenues and employmentExample: Operational spending and onsite employment of cannabis operations.Business-to-business transactionsExample: Cannabis businesses purchases goods, such as office supplies and equipment from businesses in the County. Spending of employee income Example: An office employee spends their salary on groceries and household expenses, generating sales for other local businesses.

Total Economic ImpactsSource: EPS.
•The direct effect represents the annual output or employment attributable to cannabis business operations. •The indirect effect results from industry-to-industry transactions required to satisfy the direct effect. This effect is a measure of the change in the output of suppliers linked to the cannabis industry.•The induced effect consists of impacts from employee spending in the local economy. Specifically, the employees of directly and indirectly affected businesses generate this effect by purchasing goods and services in the local economy.

Economic & Planning Systems, Inc. (EPS)EPS PPT Presentation | 4 ECONOMIC IMPACT ANALYSISCANNABIS INDUSTRIES LINKAGE TO OTHER INDUSTRIESThe cannabis industry is comparable to other industries in several ways, there are also significant additional benefits and industry synergies beyond those seen by other similar operations. Cultivation and Indoor GreenhousesCannabis and Food ManufacturingCultivation businesses serves as a significant catalyst for R&D, including the genetic innovations resulting in new strains and development of new growing technologies. Proximity to the University of California at Davis creates the opportunity for the Sacramento Region to become a hub for cannabis growing technology and research.Maintaining proper dosage throughout the manufacturing process requires very specific technology and, at times, a more intensive manufacturing operation.

Additional LinkagesCannabis manufacturing is commonly compared to craft brewery operations, which undergo similar stages of testing and development of new brewing methods.Seed variety innovations relate strongly to life and seed science research activity, including genetics research and tie-in to wider innovation in the ag industry.Distribution operations of the cannabis are similar to many non-cannabis operations choosing Sacramento as a hub for transportation and distribution infrastructure, serving growing markets throughout the western United States.

Economic & Planning Systems, Inc. (EPS)EPS PPT Presentation | 5 ECONOMIC IMPACT ANALYSIS SUMMARY OF RESULTSSacramento CountyCity of SacramentoAnnual Economic OutputAnnual Jobs Supported7,9692,6081,841 Annual Economic Output$1,487 M$284 M$201 MAnnual Jobs Supported7,9691,6951,197 $2,233 Million in Total Output$1,972 Million in Total Output12,400 Total Jobs Supported10,900 Total Jobs Supported$1,487 M$437 M$309 M

FISCAL IMPACTS
Economic & Planning Systems, Inc. (EPS)EPS PPT Presentation | 7 FISCAL IMPACT ANALYSISMETHODOLOGY AND PURPOSEThe fiscal analysis examines the estimated annual net fiscal impact on the City’s General Fund budget resulting from cannabis operations, based on the approved City of Sacramento Fiscal Year 2021/22 BudgetSpecifically, the fiscal analysis estimates whether estimated General Fund revenues attributable to cannabis operations adequately covers the cost of delivering General Fund municipal services (e.g., police and fire protection) to the cannabis businesses, as well as provide ongoing funding for the OCM.Major Sources of Fiscal Revenues AnalyzedProperty Tax RevenuesSales Tax RevenuesBusiness Operations Tax RevenuesBusiness Permitting Fee RevenueNeighborhood Responsibility Plan Fee Revenue (Non-General Fund)Major Sources of Fiscal Expenditures AnalyzedGeneral City Operational ExpendituresCannabis Operations Expenditures–Cannabis Management–Governmental Services–Fire–Police Economic & Planning Systems, Inc. (EPS)EPS PPT Presentation | 8 FISCAL IMPACT ANALYSISSUMMARY OF FISCAL RESULTSItemCultivationManufacturingDistributionRetailDeliveryTotal City General Fund Net Fiscal ImpactsAnnual General Fund Revenues$6.5 M$1.2 M$5.8 M$13.8 M$4.8 M$27.3 MAnnual General Fund Expenditures$2.2 M$0.4 M$1.7 M$2.5 M$1.1 M$7.5 MAnnual Net General Fund Surplus/(Deficit)$4.3 M$0.9 M$4.1 M$11.3 M$3.7 M$19.8 MAdditional Cannabis Fiscal RevenuesNeighborhood Responsibility Plan Fee$0.9 M$0.2 M$1.2 M$2.2 M$0.7 M$5.2 MAnnual Fiscal Impact Summary by Business Group (Millions)Cannabis-related revenues are estimated to account for approximately 5 percent of all General Fund revenues budgeted for FY 21/22Business operations taxes are the largest revenue source for cannabis operation in the City, anticipated to generate $20.7 million in FY 21/22 (73 percent of off all business operations taxes generated in the City).In addition to the estimated General Fund revenues, the neighborhood responsibility plan fee generates an additional $5.2 million in revenues.

TAXATION
Economic & Planning Systems, Inc. (EPS)
TAXATION▪Two Federal Legalization bills (Mace and Schumer) remain active but with little movement.▪Continues as a Schedule 1 narcotic on the Controlled Substances Act.▪$18 Billion spent on Federal enforcement in 2020.▪The IRS Code 280E prohibits deducting normal business expenses.▪Some form of cannabis is legal in all but 3 states and the Federal government is not collecting any of the tax on estimated sales of $100 Billion over the next 5 years.

FEDERAL ISSUES
Economic & Planning Systems, Inc. (EPS)
TAXATION▪The majority of states charge state excise taxes and prefer lower Federal taxes.▪The opt in/opt out state legalization structures across the country create different taxation metrics across counties and cities. ▪This decentralized approach pits communities against each other to reduce local tax rates in an effort to capture market share.STATE(S) ISSUESCALIFORNIAISSUES▪The state charges a wholesale cultivation rate by weight putting increased pressure on cultivators as flower and plant prices decline.–State cultivation tax by weight 2022:–$10.08 per dry-weight ounce of cannabis flowers that enter the commercial market,–$3.00 per dry-weight ounce of cannabis leaves that enter the commercial market, and–$1.41 per ounce of fresh cannabis plant.▪The state charges an excise tax at 15% on an 80% markup rate that must be paid up front to the distributor.▪The above is in addition to state/local sales taxes.▪The state is under considerable pressure to reduce taxes to compete with a thriving illicit market.

Economic & Planning Systems, Inc. (EPS)
TAXATION▪Proposition 64 (2016) requires that state cannabis tax revenues be allocated to purposes specified by the measure in the Cannabis Tax Fund.Retail and Cultivation excise taxes make up the Cannabis Tax Fund.Sales taxes are deposited into the state’s General Fund and to local programs regardless of revenue source.1▪Governor’s Budget Summary, January 10, 2022.▪The Budget estimates $594.9 million will be available for Prop 64 allocations.▪Education, prevention, and treatment of youth substance use disorders and school retention receive a mandated 60 percent ($356.9 million).▪Clean-up, remediation, and enforcement of environmental impacts created by illegal cannabis cultivation allocation is 20 percent ($119 million).▪Public safety-related activities receive 20 percent ($119 million). 1Legislative Analyist Office: How High? Adjusting California’s Cannabis Taxes.

CALIFORNIA CANNABIS TAX REVENUE
Economic & Planning Systems, Inc. (EPS)
TAXATIONAB 2506▪Suspend the cultivation tax from July 1, 2023, to July 1, 2028.▪Increase the excise tax by an additional percentage to amounts that would have been collected pursuant to the cultivation tax, from July 1, 2023, until July 1, 2028.CALIFORNIA INITIATIVESSB 1074▪Eliminate the cultivation tax and increase the cannabis excise tax to half the amount of revenue that would have been collected with the cultivation tax. ▪Then, starting in July 2026, the increase the excise tax to generate the full amount of revenue that would have been collected in the cultivation tax.

SB 1281▪Discontinue the cultivation tax.▪Reduce the excise tax to 5%” from 15% at retail. ▪Eliminate the mark-up.▪Make retailer responsible for making tax payments.AB 2792▪Suspends cultivation tax through July of 2025.▪Remove the excise taxes for qualified social equity licensees through July of 2025.▪Changes the time distributors must make tax payments.

Economic & Planning Systems, Inc. (EPS)
TAXATIONSEATTLE▪37 percent state excise tax and an optional 10 percent local tax.▪There is no cultivation tax. ▪Initially, the state did not set aside any money for local governments.▪Seattle received a reported $30 million per year in 2020.DENVER▪Cannabis tax is imposed with a 15 percent state excise tax and a local tax of 9.81 percent.▪There is no cultivation tax. ▪10 percent of the state special sales tax has been shared with local jurisdictions. ▪Denver collected more than $70 million in sales tax revenue in 2020.CASE STUDIES RevenuesFirst $40 million collected by state to be reserved for school construction.37 percent allocated to homeless housing, 6 percent to education, and 5 percent to public health.RevenuesState has dedicated funds including social equity technical assistance competitive grant fund, social equity mentor’s grant program, and basic health plan trust account.Seattle revenue funds local programs and compliance.

Economic & Planning Systems, Inc. (EPS)
TAXATIONCASE STUDIESLONG BEACH▪In 2019, lowered the tax rate for cannabis businesses from 6 percent to 1 percent.▪Collected $10.3 million in cannabis tax revenue for the fiscal year This was $6.3 million more than the projected revenue.OAKLAND▪Oakland lowered the tax rate to 0.12 percent per year for equity businesses with gross receipts under $1.5 million.▪It created a system for non-equity and larger equity businesses to tax the industry between 2.5 and 5 percent by fiscal year 2022.▪Oakland’s fiscal year 2020 tax yielded $13.7 million for the General Fund.RevenuesAll funds are deposited into the General Fund.Equity Loan Program dedicated first $3.4 Million to social equity applicants.RevenuesAll funds are deposited into the General Fund.Revenues pay for general City services, such as public safety, 9-1-1 emergency response, police officers, regulation of the marijuana industry and homeless assistance programs.

Economic & Planning Systems, Inc. (EPS)
TAXATION▪A tax rate change is not recommended due to risk of pushing sales to a large and persistent illicit market or other jurisdictions. A “race to the bottom” is not advised.▪Federal legalization and State tax initiatives will dictate viability of local tax policy.▪The Federal and state 2022 tax landscape is extremely fluid, setting-up a dynamic “read and react” situation for cities and counties. ▪Sacramento has a very strong market position with few competitors (for now).▪Sacramento’s 4% local tax does not appear to be out of line with nearby communities and is not likely a determining factor in overall industry health.▪Sacramento could help strengthen small local and CORE owners through some reductions in taxes and/or service enhancements.▪Most jurisdictions allocate tax proceeds to the general fund with the exception of some special programs.

SACRAMENTO
Economic & Planning Systems, Inc. (EPS)

TAXATIONPERMITTED CANNABIS SACRAMENTO REGION

Economic & Planning Systems, Inc. (EPS)
Regional Local Adult-Use TaxesUnicorporated Does not allow Unicorporated4% for cultivation UnicorporatedDoes not allowUnicorporatedDoes not allow5% all other activities Sacramento4% all cannabis bus.Colfax $7 PSF cultivation Marysville Cultivation:Davis10% for retail, dist., cultiv.4% retail$10 PSF artificial lighting Manufacturing, R&D, testing:2% distribution $7 PSF mixed lighting5% between $0 - $50k/mo2.5% manufac and testing $4 PSF natural lighting4% $50-100k/mo$2 PSF nurseryW. Sacramento Levied via dev Agreements 2.5% for testing6% for retailWoodland No cannabis business tax 3% for distributionUnicorporated Cultivation:UnicorporatedDoes not allowUnicorporated Cultivation: Unicorporated No set rate DAs required $2 PSF natural light$7 PSF indoorPA-20000070 sets 35%$4 PSF mixed lightBenecia1% testing, distribution$3 PSF mixed-light rate for all cannabis bus.$7 PSF indoor Manufacturing:$2 PSF outdoor4% nursery2% Yr 1 $1 PSF nursery Stockton5% for retailManufacturing:2.5% Yr 2 1% for distribution25% Level 1 (solvent)3.5% Yr 3 2% for distribution 3% for manufacturing0% Level 2 (non-solvent) Cultivation:2.5% for manufacturing 5% for cultivation$5 PSF Yr 14% for retail0% for testing4% for retail$6 PSF Yr 20% for testing 5% for microbusiness2% for distribution $7 PSF Yr 34% microbus/25% no retail0.5% for testingDixon 15% w/o DA; or per DARichmond5% all businesses So. Lake TahoeNo cannabis bus. taxRio Vista No cannabis business taxPittsburg10% all businesses Vallejo7% for retailOakleyDoes not allow5% for cultivation5% for manufacturingNo cannabis bus. tax2% for distributionUnicorporated Does not allow Unicorporated Cultivation:$2 PSF natural/mixed lightCity of Napa Does not allow $5 PSF indoorAmerican Cnyn.No cannabis bus. tax7% retail and manufac.Source: EPS.Antioch; Concord; El Cerrito; MartinezEl Dorado County Solano County Conta Costa CountyNapa County Calavaras County Sacramento County Yolo County Placer County Yuba CountySan Joaquin County