Oregon's billion-dollar weed economy faces new challenges

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They've never been higher.

Oregon recreational marijuana sales have climbed to record highs, but some say the industry's woes also have reached an apex. The difficulties range from an unfavorable federal tax code to a dangerous crime wave, wildfires, and cities and counties hungry for a larger slice of the tax pie.

"Businesses are still struggling," says Kim Lundin, executive director of the Oregon Cannabis Association. "High sales don't transfer to overall industry success."

But the marijuana milestone — $1.1 billion in sales in 2020, blowing past the $795 million benchmark set in 2019 — has started a battle for cash at the state Capitol regardless.

 
 

New York Governor Andrew Cuomo signed a bill on Wednesday to legalize adult use of marijuana making it the 15th U.S. state to allow recreational use of the drug, while Virginia moved to legalize possession of small amounts by July. This report produced by Gavino Garay.

Rep. Mark Owens, R-Crane, has advanced legislation that would allow cities and counties to bump their marijuana sales tax from 3% to as much as 10%. Another proposal authored by Rep. Lily Morgan, R-Grants Pass, would create an internal wholesale tax on any marijuana transported across county lines.

 

The temptation to backfill shrinking local budgets with cannabis dollars is worrisome, according to industry boosters.

"If you look at it holistically," said cannabis economist Beau Whitney, "I think the Oregon market is under duress."

Tax fight

 

The new tax fight is largely in response to Measure 110, the voter-approved initiative from last year that reallocates a large share of pot revenue away from schools, state troopers and local governments in order to fund drug treatment addiction services.

 

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In the next two-year budget cycle, which begins July 1, cities and counties will have only $18 million in marijuana money to split amongst themselves, an almost 72% drop compared with the $63.7 million they expected under the old funding formula, according to the League of Oregon Cities.

City Halls eager to bump up their cannabis tax include Gresham, Hillsboro, Beaverton, Tualatin, Sherwood, St. Helens, Happy Valley, Eugene and Bend, staff for the league said in testimony to a revenue committee hearing of the Legislature on March 4.

 
 

League of Oregon Cities lobbyist Mark Gharst told lawmakers the COVID-19 pandemic prompted a decline in lodging and gas taxes, park and development fees — and the worst crunch for city budgets may be yet to come, if property tax revenues fall due to commercial vacancies.

 

"I don't think that the voters were saying that they wanted local governments to cut services in order to fund that recovery," Gharst said. "We can have our cake and eat it, too."

Marijuana insiders see it differently. They say cannabis retailers can't just pass the tax increase on to users, many of whom could dial up their old dealer from the years before legalization.

 
 

Whitney, the economist, estimates that most consumers will pay a premium of just 10% to 15% to acquire their weed legally. Go above that, and they might just get their marijuana on the black market.

"Consumers are very price conscious," agreed Casey Houlihan, executive director of the Oregon Retailers of Cannabis Association. He calls the proposed 10% tax a "disaster" in the making, saying the lure of the illicit market could lead governments to collect less in the future than they do now.

 
 

"One only needs to look around on Instagram to see cheap ounces or pounds being sold," Houlihan said.

Bursting bubble?

State data confirms that customers haven't noticed much difference at the cash register so far.

 

Despite the billion-dollar consumer market in 2020, the average retail price for consumers has remained at or below $5.50 per gram nearly every month since July 2018, the Oregon Liquor Control Commission said in its Feb. 1 supply-and-demand report.

The price of wholesale flower, the smokeable part of the cannabis plant, hit $1,499 per pound in December 2020, levels not seen since late 2017.

 

That's good news for growers, who for years have complained that Oregon's cannabis market is oversupplied. Demand is now devouring 65% of annual supply, up from just 50% two years ago, per the report. That happened because purchasing outpaces crops; overall production leapt 78%, while the amount of cannabis sold rose 150%.

 
 
 

The sea of upward arrows likely explains the new push to raise weed taxes, though the Oregon Liquor Control Commission predicts there's no way the market can sustain the 38% annual growth rate seen during the outbreak.

"If not for COVID, growth in demand in 2020 would have almost certainly been flatter," the OLCC concluded in its report to lawmakers. "If consumers return to the patterns of consumption they exhibited pre-COVID, demand will almost certainly decline or flatten in 2021."

 

Whitney also predicts the growth rate will slow, though he thinks the odds of sustaining a billion-dollar industry in the years ahead are fairly high, given that the market would have expanded by at least 10% during a normal year.

The economist wants to dispel the notion that the bump in weed sales can be traced to Cheech and Chong slackers or out-of-work millennials from the service industry. Instead, his money is on the white-collar types earning more than $50,000 while logging onto work in their PJs.

 

"Once people got used to 'working from stoned,'" he says, "they just kept doing it."

Plenty of problems

 

Regardless of how the tax increase proposal shakes out, the Oregon recreational marijuana industry is facing a passel of other hurdles.

Lundin, the trade group director, said several dispensaries burned to the ground in Medford and Talent during the 2020 wildfires. Other farmers also lost crops. And as Willamette Week recently reported, more than 100 dispensaries in Portland have been robbed or burglarized since March, likely because pot shops largely deal in cash. Those charged in the crime spree are predominantly teenagers.

 
 

"Historically, (the police) have not demonstrated the willingness we would like to see at taking these types of crimes seriously," Houlihan said.

 

Another longtime thorn in the side of legal cannabis business owners is the section of the federal tax code, known as 280e, that essentially prohibits pot enterprises from deducting any expenses from their gross earnings.

 

"It's an onerous tax burden," said Jeff Yapp, CEO of Golden Leaf Holdings. "You can't deduct any of your business operating expenses that every other business enjoys."

Listed on the Canadian Stock Exchange but based in Portland, the vertical integration of Golden Leaf stretches from a grow facility near Bald Peak to a string of Chalice Farms dispensaries in Portland.

Flower and pre-roll sales make up more than 50% of their sales, but Yapp said the company saw edibles — food products that contain cannabis — flying off the shelves during the pandemic, as newbies sought an unimposing way to get high. Yapp said he believes the lack of nightlife and travel in 2020 triggered the booming sales, and sees potential in the three-quarters of the populace who may sooner smoke weed than try pharmaceutical products.

 

"You look at the scale of opportunity in plant-based medicine — that's 75% of the marketplace — who all suffer the same issues: 'I can't sleep, I'm in pain, I've got anxiety,'" he said. "As they continue to be open to the alternatives, I think that's a massive opportunity."

 
 
 

Help from D.C.?

Oregon's best hope for reforming the federal tax code — or achieving the larger goal of removing marijuana from the same classification as heroin — may lie with U.S. Congressman Earl Blumenauer.

The Democrat from Portland helped shepherd passage of the MORE Act — the Marijuana Opportunity Reinvestment and Expungement Act of 2019 — through the House in December, which would have decriminalized marijuana at the federal level, but the bill stopped in its tracks when it hit the Senate, which then was controlled by the GOP.

 

That proposal, as well as the SAFE Banking Act, could be reinvigorated under the Biden administration, though Blumenauer admits the new president has sent some mixed signals so far. Other observers note that any reduction in IRS revenue likely would need to be paired with a federal cannabis tax to pass muster.

"There's a lot of competition just to get this on the floor of the House, but I think we're in the strongest position that we've ever been in," Blumenauer said. "It's basically Congress that needs to do its job and I think Congress can and will do it."

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