By Zusha Elinson
HAPPY VALLEY, Ore.--As voters in this state prepare to decide
whether to legalize recreational marijuana, a dispute over taxing
the drug is demonstrating the complexity of transforming a black
market into a legal one.
Drafters of the Oregon initiative, Measure 91, have proposed a
state tax on pot producers that would be lower than those in the
first two states where recreational pot was legalized, Colorado and
Washington. Their aim is to prevent a situation where high prices
at authorized pot shops push buyers to the black market.
But ahead of November's election, dozens of Oregon cities eager
for a piece of the pot-revenue pie, including this quiet suburb
outside Portland, have passed plans for their own local taxes on
pot sales, setting up a possible legal battle if the measure
passes.
The squabble underscores how little is known about the
appropriate way to tax legal marijuana, experts say.
"If the tax is too large, then you'll still have the black
market," said Beau Kilmer, co-director of the RAND Drug Policy
Research Center. "If you have low taxes, you may not get as much
revenue as you want."
In Washington and Colorado, tax revenue from recreational
marijuana has so far come in below initial projections. Officials
had estimated that Washington could reap as much as $300 million in
the first full year of sales from taxes and license fees, but now
the state's Economic and Revenue Forecast Council puts that number
at about $25 million, while noting substantial increases in later
years. Meanwhile, Colorado anticipated an annual boost of $70
million in taxes alone, but pulled in $21.8 million in taxes and
license fees in the first six months.
Next month, residents in Alaska and Washington, D.C., also will
vote whether to legalize recreational marijuana for adults over 21.
A majority of Americans say they favor laws allowing adults to buy
small amounts of pot from state-licensed businesses, according to a
Wall Street Journal/NBC News poll released earlier this year.
Backers of legalization in Oregon and Alaska are proposing taxes
on wholesale marijuana by weight that figure to be lower than the
combinations of sales and excise in Colorado and Washington. (The
D.C. measure doesn't address regulation of sales and taxation). The
Oregon measure would result in a roughly 15% tax, while Alaska's
would be 21%, according to an analysis by the Tax Foundation in
Washington, D.C. That compares to a 44% effective tax in Washington
and around 30% in Colorado.
Dave Kopilak, a corporate lawyer who helped draft the Oregon
measure, said that setting the tax rate is a "balancing act between
maximizing revenue, discouraging underage use and eliminating the
black market." He said that high taxes in Washington are
contributing to high prices at legal pot shops, making the black
market a cheaper alternative.
Oregon cities passing their own taxes on pot sales are
"undercutting our goals," he said, adding that the measure would
forbid such taxes.
More than 60 Oregon municipalities have passed or proposed local
taxes--most would be 10%--according to the League of Oregon Cities.
Ashland, located near the California border and home of the annual
Oregon Shakespeare Festival, pioneered the tactic earlier this year
in part because the city hopes to cash in on pot tourism, said city
manager Dave Kanner. The ballot measure, as written, doesn't give
enough money to cities, he said, adding that he believes the local
taxes would withstand legal scrutiny.
Measure 91 proposes that 40% of tax proceeds go to a schools
fund, 20% to mental-health and drug services, 15% to state police,
and 20% to counties and cities, depending on the number of licensed
marijuana business. The state legislature could tweak the measure
if it passes.
Meanwhile, opponents say that tax revenue isn't worth approving
legalization. People aren't "thinking about the social costs, which
will far outweigh any tax revenue," said Mandi Puckett, director of
the No on Measure 91 campaign.
Just north of the Oregon border in Vancouver, Wash., the
proprietor of a pot shop called New Vansterdam has seen firsthand
how the black market continues to thrive.
Brian Budz, the president of New Vansterdam, said that since the
store opened in July, he has called police three times to report
street dealers outside trying to lure his customers away with lower
prices.
The tax scheme in Washington "is not optimized in order to try
to bite into the black market," said Mr. Budz, who previously
worked in sales at Nike. "The way [the Oregon measure] is written,
Oregon really has a shot to go after the black market."
On recent rainy afternoon at New Vansterdam, an eighth of an
ounce (3.5 grams) of marijuana was going for $87 to $128, two or
three times what it costs on the black market or at a medical
marijuana dispensary. Still, there was a steady stream of customers
coming through the store, which is located in a shopping center
along with a Safeway, RadioShack and Weight Watchers.Jason, a
36-year-old who didn't want his last name used, bought four grams
of marijuana, including one gram of Presidential OG Kush for $42.
"You usually can get an eighth for $40," he said, but added that he
appreciated the convenience of the pot shop. "That's what you're
paying for." When Washington voters went to the polls in 2012, the
state's Office of Financial Management estimated the total revenue
generated for the state in taxes and fees could be as high as $2
billion over five years.
But the state won't be seeing billions any time soon. Pot sales
could fall well short of projections in the first year because of
its high tax rate, competition from medicinal marijuana "and a slow
start to licensing retail stores," Moody's Investors Service said
earlier this year. Just 70 of the planned 334 retail shops have
been licensed, according to state officials.The pot measures in
Oregon and Alaska are expected to be closer than the one in D.C.,
which has a sizable lead in pre-election polling. A recent Oregon
Public Broadcasting/Fox 12 election survey put the Oregon measure
up 52% to 41%, with 7% undecided.
With sales beginning in July, the state's Economic and Revenue
Forecast Council estimates $637 million for the first five
years.
Alison Holcomb, primary author of the Washington measure, said
it is too early to say how taxes are affecting the price of
marijuana. She said that the current prices are more a result of a
scant supply of legal pot.Meanwhile, Colorado is on pace to bring
in more tax revenue than Washington in its first year, although it
missed some early projections due to competition from medical
marijuana, which is taxed at a lower rate, according to some
experts.
Tim Hibbitts, whose firm conducted the poll, said that although
it is in a position to win, the victory isn't locked down, noting
that the measure could be hurt by lower turnout during the
nonpresidential election year.
Write to Zusha Elinson at zusha.elinson@wsj.com