Cannabis industry’s sad state prompts changes across Santa Cruz County

Ask anyone involved in the local industry and you’re likely to hear the same thing. After six years of legal recreational cannabis in California, reality has not lived up to the rosy promises that surrounded the statewide legalization effort. 

The plant’s pandemic peak that brought new highs in pot prices and optimism was a precursor to extended struggle. Hyperlocal numbers are tough to find, but statewide data shows that over the first three months of 2024, cannabis revenue fell to $1.2 billion, a number not seen since the onset of the pandemic in 2020. Analysts have talked about an industry collapse. Locally, dispensaries and grow operations complain that high taxes and increasingly stiff competition from the black market are dragging operations down and out of business. 

Amid this bleak outlook, Santa Cruz County, Watsonville and the City of Santa Cruz have all revisited their local regulations in recent months, largely with an eye toward unlocking cannabis’ economic potential in ways both simple and groundbreaking; however, the City of Santa Cruz, more than the other jurisdictions, appears more focused on reining in the local industry. 

“With ordinances like this and industries like this, we have to try and adjust over time as things change, it’s still a bit of the Wild West out there,” Suzi Merriam, Watsonville’s development director, said. “It’s a lot of trial and error. We thought we’d get so much money from this. As things have normalized, we see cannabis is not going to be our panacea. But it’s still something you want to see thrive.”

Santa Cruz County

“The Napa of pot” might not roll off the tongue, but it’s a vision some Santa Cruz County officials and elected leaders are pushing in an effort to not only keep the industry buoyant but to have it thrive. 

The pitch: incorporate cannabis into local agritourism, and allow cultivators to welcome visitors for tours, tastings and purchases, similar to wineries. Right now, cannabis customers can buy legal products only directly from dispensaries. 

The county is also looking into permitting dispensaries to offer on-site smoking lounges, and allowing cultivators in good standing to more easily expand their operations each year. 

Supervisors Manu Koenig and Felipe Hernandez first floated the ideas last fall with a list of other weighty changes to how the county regulates pot. 

Following an extended public engagement process earlier this year, the county’s board of supervisors directed staff in June to draft up ordinance change proposals. Sam LoForti, the county’s cannabis licensing manager, said he expects staff to come back to the supervisors later this year with drafts of the rewritten laws. If the supervisors like them, the changes will go through the planning commission before coming back to the supervisors for a final vote. 

“Santa Cruz County is at the leading edge if we are able to do this, because there aren’t retail farms mimicking wineries anywhere in the state,” LoForti said. “This could be an opportunity to make this part of our county’s agritourism history.”

Pat Malo, general manager of Envirocann, a local organization focused on promoting sustainable cannabis cultivation practices, said the cannabis market has been teetering at the brink of collapse. The government, he said, has a critical role in changing that. 

“As long as we’re working on things that is a good sign,” Malo said. “This possible access to a new revenue stream for farms would be a big deal. It’s not going to fix everything, we still have major structural hurdles in the industry. But it will help people survive.” 

Watsonville

The changes approved last month by Watsonville’s city council showed how central politics is to the cannabis question. 

Watsonville has long been seen as conservative on pot. Merriam, the city’s development director, said although cannabis was viewed as a potential boon to tax revenue, the city was “behind the eight ball the entire time” and was slow to permit recreational cannabis in town. When the city did bring in dispensaries, it relegated them to industrial zones, away from the broad public’s eye. 

In June, the city council voted 4-3 to welcome sweeping changes to its regulations, with councilmembers Jimmy Dutra, Maria Orozco and Kristal Salcido voting against. The vote made some administrative changes, such as allowing cannabis businesses to use typical store signage, eliminating a requirement that businesses have 24/7 on-site security, and allowing cannabis owners to hire managers without performing a background check. 

However, the most significant change related to zoning. Moving forward, new dispensaries will be allowed in commercial zones, elevating them from backstreet warehouses to storefronts along busy thoroughfares, though not along Main Street in downtown. 

Grant Palmer, who owns and operates CannaCruz in Watsonville and Santa Cruz with his brother, Brad, called Watsonville the “friendliest place to do [cannabis] business in Monterey Bay.” 

The moves were part of an effort to boost both the local cannabis industry and spur economic development. The city did not, however, increase its dispensary permits beyond three. In order for an operator to take advantage of this new zoning rule, an existing dispensary would have to close. 

Merriam said the long debate in the city of Santa Cruz over whether to allow The Hook Outlet dispensary to take over the old Emily’s Bakery on Mission Street helped push along the zoning change in Watsonville. 

“Visibility for cannabis dispensaries was the most significant change we made,” Merriam said.

The changes come three years after the city voted to lighten the local tax burden on cannabis. Watsonville Planning Commissioner Daniel Dodge said in May that he hoped these new rules would help animate the sputtering local industry. 

“We thought cannabis was going to be the golden fleece, that it was going to solve all our cities’ problems, and take care of this and that,” Dodge said. “But because of the burdens placed upon the industry, it never materialized into the cash cow everyone was hoping for.” 

City of Santa Cruz

Over the past year, the cannabis industry in the city of Santa Cruz has faced the same uphill economic realities seen elsewhere in the state; however, new public safety and cultural challenges have cropped up as well. 

Amid that organized push from the Santa Cruz City Schools district and local parents to kill the dispensary proposed at the old Emily’s Bakery building, Mayor Fred Keeley announced that the city council would form a subcommittee to begin a global examination of local cannabis issues, from taxes to public safety and zoning. 

Yet, while Santa Cruz County and Watsonville have focused their efforts on expanding the abilities of pot sellers and producers, the City of Santa Cruz is considering tightening its leash. 

Although the dispensary proposed for the old Emily’s Bakery location was outside the legal buffer surrounding schools, parents and the school district felt the business was too close to Santa Cruz High School and Mission Hill Middle School. The city council eventually approved the dispensary’s application; however, the debate inspired the city to consider changing its rules around dispensary proximity. 

Senior city planner Clara Stanger said her department is looking at increasing that buffer zone around schools from 600 feet to 800 feet, further limiting the addresses that could host a dispensary. Stanger said her department is still analyzing data on the impact of that change. 

The Emily’s Bakery situation also highlighted what the city sees as a potential missed opportunity in its cannabis tax structure. The city has only five available dispensary permits, awarded to operators through an intensive application process. The limited supply boosts the value of these permits on the secondary market. The Hook Outlet — the dispensary opening at the former Emily’s Bakery location — received its dispensary permit not through a city application process but by purchasing the permit from another operator for an estimated $500,000. The city has no claim to the permit once it’s awarded, so it cannot extract any tax value from that transaction. Stanger said her department is also looking into the feasibility of implementing a transfer tax that could help the city benefit when permits change hands.

The city also has a new focus on improving its score on the statewide Getting It Right From the Start scorecard. Led by the Advancing Public Health & Equity in Cannabis Policy organization, the scorecard measures how well local jurisdictions insulate youth from the legal cannabis market. The City of Santa Cruz scored 42 out of 100 in 2023 (Stanger said the statewide high was 51). Local laws that go further state law score higher, Stanger said, and the city is looking at ways to improve its score, though Stanger said those are still in its early stages. 

“The City of Santa Cruz has been pretty good to the industry, but what they’re talking about enacting is bad,” Palmer, the owner of CannaCruz, said. “It feels like the city has grown pretty hostile toward us and is trying to solve problems that don’t really exist.” 

Stanger acknowledged that the cannabis industry was struggling in California, and said the city is looking into some tax reductions and cracking down on the psychoactive hemp market that competes directly with legal cannabis. However, while some jurisdictions are revisiting their regulatory structures to help businesses survive, she emphasized that the health impacts of legal cannabis were still being studied and that governments need to adjust to that as well. 

“We’ve been collaborating with the county’s public health department, and they’ve indicated that there is an increase in cannabis-related substance issues among youth, not just in Santa Cruz, but everywhere,” Stanger said.

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