What Happens if Oregon Legalizes?

Oregon

It is high time to start speculating about what it will mean if Oregon legalizes recreational marijuana on November 4, 2014. What will the business environment be like? What are the implications for the industry in the state of Washington? And what might it mean for everyone else when two contiguous states, a giant chunk of Pacific Northwest coastline, permit recreational use?

 

Oregon’s Business Readiness

With respect to potential recreational sales, there are two big questions for Oregon: How soon after legalization will the roll out happen? How smoothly will it go?

How soon depends on the state of regulatory infrastructure. Colorado already had a medical marijuana infrastructure in January 2014, so recreational shops were able to open at the beginning of the year; Washington did not have this infrastructure, and it cost six months of operation.

Medical marijuana has been legal in Oregon since 1998, but until the March 2014 enactment of the Oregon Medical Marijuana Program, patients either had to grow it themselves, or designate someone to grow it for free. It may be helpful that the Oregon Health Authority has a system for regulating medical marijuana dispensaries, but some of that infrastructure is fairly new, itself.

From the consumer’s perspective, how smooth the debut is depends on how long the lines are, and that depends on the quantity of the product available. It is still too soon to tell if growers will be ready.

 

Oregon’s Tax Plan

Oregon plans to tax marijuana sales largely on the basis of weight, at $35 per oz. for flowers, $10 per oz. for leaves and $5 per plant for immature plants. These rates will be subject to a cost of living increase every two years beginning in 2017. This is more like Colorado’s tax structure than Washington’s, but different, and some say better, than both.

As proposed, Initiative-53 sets out three goals for taxation: maximizing state revenues, minimizing the illegal industry and discouraging use by those under the age of 21. Tax revenues will be set aside from the General Fund, and be used first (up to a maximum of $250,000) to cover the cost of regulating the industry. Thereafter, revenues will be allocated as follows:

  • 40 percent to Common School Fund
  • 20 percent to Mental Health Alcoholism and Drug Services
  • 15 percent to State Police
  • 10 percent  to cities to assist in law enforcement
  • 10 percent to counties to assist in law enforcement, and
  • 5 percent to Oregon Health Authority for alcohol and drug abuse prevention, early intervention and treatment services

Proportionately speaking, the big winners are public schools and law enforcement.

 

What This Might Mean for Washington

Washington’s experience with legalization is only one month along at this point. There have been some predictable bumps in the road, including a delayed roll out, shortages, competition with its own cheaper medical marijuana, and subsequent shortfall in tax revenues. Perhaps the single biggest reason to anticipate that Oregon’s experience may be different is because of the tax structure.

Washington taxes recreational marijuana on the basis of dollar value rather than weight, with a 25 percent excise tax levied at production, wholesale and retail levels. This makes for an effective tax rate of 44 percent, according to Moody’s. This gets passed along to consumers through increased prices.

Consequently, Oregon retailers may be in a stronger position when compared to businesses just over the state line. Washington’s dispensaries are unlikely to suffer in silence. A big price differential might also concern Washington’s law enforcement if it were to cause the black market to shift northward. Does it push the speculation too far to suppose that Washington state legislators might find themselves under pressure to amend the tax structure after only one year’s experience?

 

Look at the Map

Together, Washington and Oregon make up a big chunk of real estate. Something that big starts to develop its own political force of gravity. If Oregon legalizes on November 4, and if the respective industries in Oregon and Washington work through their competitive positions in a way that leaves both standing, then what about California?

More to the point, why is this conversation framed in terms of interstate competition? Most businesses in other industries make plans on the assumption that they will do business in several states. Oddly, it is mostly the “sin” industries, like alcohol and tobacco that are heavily regulated by states.

Until 1995, banking also fell into that group. There is no reason to anticipate that a single entity will be able to sell recreational marijuana in more than one state any time soon, but it may be worth planning ahead of the current game. If federal restrictions are ever lifted, we might, one day, actually discuss interstate commerce.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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