Sales Tax Decline Buffets Ukiah, County

Sales tax revenue continues to slip in the city of Ukiah, the region’s retail hub, and Mendocino County as a whole, presenting new challenges for local government agencies.

Ukiah city officials said they expect a $1 million shortfall in sales tax revenue this year from what was originally projected.

“This year’s budget will be more about needs than wants,” said Deputy City Manager Shannon Riley.

The latest sales tax report shows the city’s overall sales tax revenue declined a sharp 9.5 percent during the fourth quarter of 2022 from a year before, signaling a sluggish local economy that is still buffered by inflation and big declines in spending related to the county’s struggling cannabis industry.

Sales in garden and agricultural supply businesses, for example, plunged 12.6 percent in the city and 11 percent countywide compared to a statewide average decline of 5.4 percent, according to the latest sales tax update provided to city and county officials by tax consultant HDL. An even sharper drop in spending in sporting goods and recreational stores was pegged at 18.2 percent in the city and 17 percent in the county, compared to a statewide average of 4.4 percent.

Underscoring the North Coast region’s sagging economy was the fact that there was only one reported increase in sales tax revenues for the city of Ukiah and only two countywide — service stations and drug stores — compared to eight sales tax revenue increases posted statewide in the 10 spending categories tracked.

The city registered only a single increase in sales tax revenue, and that was from local service stations. It was a meager .6 percent rise compared to 1.4 percent for the county. The local figures paled compared to a jump of 7.5 percent at service stations statewide.

The sales tax revenue updates cover the final three months of 2022, typically the biggest spending period for consumers. 

The updates show a local economic slowdown continues at a pace greater than throughout the North Coast region in general and statewide, according to the statistics supplied by HDL Companies, the Southern California firm that specializes in compiling sales tax revenue for government agencies statewide.

In its latest report to the city of Ukiah HDL noted that even sales tax revenue was off in the city in all but one category, statewide the local one cent sales and use tax receipts for sales during the months of October through December were 4.7 percent higher than the same quarter a year before.

Statewide, HDL found that “a holiday shopping quarter, the most consequential sales period of the year, experienced solid results which lifted revenue to local agencies across the state.”

But not in Ukiah, or Mendocino County. 

HDL found that actual sales in Ukiah were down 5.9 percent, and taxable countywide sales dropped 6 percent over the comparable time period. Neighboring counties suffered a 3.6 percent declined in comparison, according to HDL.

HDL said the local and statewide outlook for the remainder of the year looks bleak.

“Heading into 2023, additional interest rate hikes along with consumer sentiment waning about the economy foretells minimal change ahead from California’s taxable sales in the months ahead,” its report concluded.

Mendocino County’s overall budget status is murky, and how declining sales tax revenue affects its financial status is unclear. County officials are bogged down in confusing budget delays, uncertainty about accuracy of revenue projections, and a sharp shrinkage in the local cannabis industry because of chronic questions about a local regulatory framework. 

City officials are more confident. Deputy City Manager Riley said Ukiah in general tends to “weather economic situations well because of our diversified tax base, and the fact that we are a regional hub for such a large geographic area.”

“Even in tough times people come to Ukiah for medical needs, education, legal and business services, and general necessities,” said Riley. 

Riley said the city has been fiscally conservative for several years and has healthy cash reserves in order to meet any financial crunch.

Still, Riley said there is no doubt that the “crash” in the local cannabis industry is taking its toll across the board in retail pot sales, garden, and farming supplies, and in auto sales. 

“The Emerald Triangle is experiencing a very different economy than the state overall,” said Riley.

In a special report entitled “Cannabis Supply and Demand in 2023” released two weeks ago, HDL researchers declared “California’s cannabis industry is not dead, and it’s not dying. It’s just realizing that the market is not large enough to support everyone hoping to get a slice of the piece.” 

“With every new market, comes an inevitable correction. California’s cannabis isn’t dying. It’s just not as large as people thought,” HDL told its clients.

HDL said the current situation reflects a harsh fact that small cannabis growers on the North Coast face stiff competition from big companies elsewhere.

HDL said based upon “rough estimates, the 20 largest cultivation companies are capable of producing over 2.6 million pounds of (cannabis) flower per year, enough to supply the entire statewide market.”

“This is not unique to the cannabis industry,” concluded HDL.

HDL said there are more than 11,000 wineries in the U.S., but the 50 biggest companies alone represent more than 90 percent of domestic wine sold by volume. The same is true with the brewing industry. Nationally there was 9,247 breweries, but most of them share just 13 percent of the total market, according to HDL.

“California’s cannabis industry is being shaped by the same free market forces that shape other industries, with the predictable result of concentrating market share into the hands of a few large companies,” according to HDL.

In short, HDL found that “It is likely that independent small (cannabis) businesses will continue to struggle as they compete for some small percentage of the market.”