Oregon cannabis retailers warn tax hikes would send business to black market

(The Center Square) – A bill in the Oregon Legislature could triple cannabis taxes at the local level and drive more business underground, industry experts say.

When Oregonians legalized cannabis in 2014, cannabis producers paid a harvest tax of $35 per ounce. In 2015, Oregon lawmakers swapped out that producer tax with a 17% sales tax levied on retailers. They also allowed local governments to tax retailers up to 3%.

Senate Bill 864 would expand the top tax rate local governments could impose on cannabis retailers from 3% to 10% beginning in 2022. That could raise as much as $70 million in tax revenue for cities and counties, analysts project, or about three times what they made from the industry in 2020.

Cities like Ontario have proposed raising their cannabis taxes to 7% in the hopes that neighboring communities in Boise, an hour’s drive to the east, would too.

On paper, Oregon’s cannabis industry is thriving. According to a report from the Oregon Department of Revenue, the state saw cannabis sales skyrocket from $795 million in 2019 to more than $1.1 billion in 2020. Cannabis is also the fastest-growing job sector in the country and is responsible for up to 22,000 jobs in Oregon alone, a study by economist Beau Whitney found.

According to Kim Lundin, executive director of the Oregon Cannabis Association, those figures don’t show the whole picture. Most retailers are riding on razor-thin margins without access to bank loans or bankruptcy protections. So long as the industry is under federal prohibition, taxes are just one burden cannabis retailers will contend with, Lundin said.

“It’s a dangerous narrative for us to say that the cannabis industry is doing well without understanding the whole picture of how it’s struggling,” Lundin said. “Our businesses only made it through last year because we were allowed to stay open and because, fortunately, demand increased through the pandemic.”

Sally Alworth, the owner of a Portland cannabis shop, Luminous Botanicals, pays the same taxes any other entrepreneur owes—city, county, and state. She also pays $5,000 to the state for a cannabis license, $4,000 to the city of Portland for a cannabis business license and $4,800 for a business checking account at the one credit union that will work with her. On average, Alworth pays 62% of her annual net income in taxes, leaving her with little to no money left over to reinvest back into her business.

“We simply cannot afford to drop our wholesale price in response to a sales tax increase,” Alworth told state lawmakers in March. “Oregon is rapidly becoming the kind of cannabis market where the only companies that can survive are large chains that raise significant venture capital or companies that sell out to multi-state operators.”

Oregon Liquor Control Commission analysts reported the state had issued 81 new cannabis producer licenses between Nov. 1, 2019 and Sept. 30, 2020. That’s the lowest number since licensing by OLCC began. In Oregon, the cannabis industry is also seeing a widening racial gap the state has yet to close.

For each 1% increase in cannabis sales taxes, Whitney estimates, the state could see a 2% increase in black market sales as rising prices send customers packing. That could plunge cannabis tax revenue by as much as $24 million or 2,800 jobs if local governments seek the top-tier tax rates.

“The impact of this legislation is that sales will decline, tax revenues will be reduced, there will be a potential reduction in employment and an increase in services required of the state, such as healthcare,” Whitney told state lawmakers in May.

This is the second time this session that the Oregon Legislature has tried to hike cannabis taxes without industry backing. A similar bill, HB 2015, was introduced in March by state Rep. Mark Owens, R-Crane, before its metamorphosis into SB 864. The latter is backed by Owens, Sen. Lynn Findley, R-Vale, and state Sen. Ginny Burdick, D-Portland.

SB 864 is one of several tax bills spinning their wheels in committee. As of Wednesday, it remains in the Senate Finance and Revenue Committee.

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