Oregon’s recreational cannabis tax is bringing tens of millions more tax dollars to the state than predicted. Yet the police departments that provide enforcement of the law against illegal cannabis players in rural counties do not have enough money to fulfill their enforcement requirements.
Tax Allocation Formulation
In 2014, when Measure 91 passed to legalize recreational cannabis in Oregon, it also set the allocation of the projected tax revenue to various agencies and programs. Recreational cannabis tax revenue is distributed to recipients that are tasked with combating illegal marijuana production and trafficking, and to other worthy, but more tenuously related programs and agencies. The current allocation is the result of careful calculus as to what was needed to gain support for the legalization process. These slices of the pie were designed to win votes, especially the slice allocated to Oregon schools.
Oregon statute provides for a 17% retail sales tax on recreational cannabis items. (O.R.S. § 475B.705 2017). The tax revenue is allocated through the Oregon Marijuana Account, separate and distinct from the General Fund. (O.R.S. § 475B.759 2017). Local jurisdictions can and do impose an additional 3% tax on recreational cannabis sales. The Oregon Marijuana Account funds are distributed as follows:
Tax revenue allocated to cities and counties
Twenty percent of Oregon recreational cannabis tax revenue is allocated to cities and counties that have not opted out of allowing businesses licensed under the Oregon Liquor Control Commission (OLCC) recreational cannabis program to operate within their jurisdictions.
Seven and one-half percent of the funds are allocated to cities based on their population and 2.5% is allocated based on the number of recreational cannabis businesses located therein.
Counties receive 5% percent of the funds based on the square footage of production canopy they contain, and another 5% percent based on the total number of recreational cannabis businesses within their borders.
Tax Revenue Allocated to State Programs
Forty percent of recreational cannabis tax goes to the State School Fund; 20% to mental health treatment or for alcohol and drug prevention, early intervention, and treatment; 15% to the State Police Account; and the final 5% of the funds are allocated specifically to alcohol and drug abuse prevention, early intervention, and treatment services.
Local Tax on Retail Sales
In addition to the 17% tax, cities and counties can elect to impose an additional 3% tax on retail sales of recreational cannabis. (O.R.S. § 475B.491 2017). All jurisdictions that have not opted out of the recreational cannabis program do impose this tax. However, because retail shops are concentrated in cities, it is the incorporated areas of the state that are the chief beneficiaries of local tax. Unincorporated counties, which contain most of the state’s production infrastructure but few taxable retail stores, bring in less local recreational cannabis tax.
Tax Revenue is Far Exceeding Expectations
Oregon recreational cannabis sales, and resulting tax revenue, has far exceeded projections. According to data released by the Oregon Department of Revenue for the 2018 fiscal year, the Oregon Marijuana Account took in $82,203,729, more than double the original annual estimate of about $40 million. (Oregon Department of Revenue, Oregon Marijuana Tax Statistics: Accounting Information, (2019), available at https://www.oregon.gov/DOR/programs/gov-research/Documents/Financial-reporting-receipts-public.pdf).
Even as recreational cannabis receipts and disbursements exceed expectations, enforcement costs for rural counties continue to exceed their tax revenue receipts.
Black and Grey Market
For many decades, Oregon has been home to a robust black market cannabis economy. This includes participants in all levels of production and distribution. Though the legal cannabis industry, working hand in hand with lawmakers and regulators, has taken a sizeable chunk out of the black market, illicit production and sale remains a major problem in Oregon.
Oregon’s is amongst the most mature and well-functioning recreational cannabis programs in the country. Still, according to the OLCC’s 2019 Recreational Marijuana Supply and Demand Legislative Report, only 55% of cannabis consumption in Oregon by adults 21 years of age and older comes from the licensed retailers. The other 45%, along with the overwhelming majority of the recreational cannabis exported from Oregon, is supplied by the black market. Despite widespread speculation and concern about the state’s ongoing oversupply problems, there is little evidence of large-scale diversion from OLCC licensees.
Illegal Grows Concentrated in Rural Counties
While illegal recreational cannabis production and trade spans the state, the comparative open space and lack of law enforcement in rural southern and eastern Oregon make it a hotbed for illegal grows and a primary source for black market cannabis. “Large swatches of rural Oregon are the Wild Wild West…it’s easier to hide there. It just is,” said Rob Bovett, Legal Counsel for the Oregon Association of Counties. Thus, the burden of policing illegal cannabis activity in these areas is onerous. Because of the collapse of Oregon’s timber industry in the 1990s, governments in many of these areas are generally already underfunded, and their small share of the recreational cannabis tax does little to make up the difference.
Consequences of lack of enforcement
Lack of enforcement allows illegal cannabis production and trafficking to flourish, increasing access for minors, reducing the market for legal businesses, and distributing to the public cannabis that has not been tested for potency or chemical contaminants.
Roadblocks to fixing the problem
The roadblocks to providing more funds to counties for enforcement vary from partisan politics to the deficit in the state’s Public Employee Retirement System, or PERS.
Many rural counties’ budgets were built around timber revenue which dropped dramatically with changes in environmental protection laws in the 1990s. The resulting economic collapse in some rural parts of the state has left some counties with budgetary woes from which they have hardly begun to recover nearly 30 years later. As such, the cost of conducting meaningful enforcement activity against illegal cannabis is a hardship in many of the exact areas in which that production is concentrated. Complicating the situation is a hesitancy among some democratic lawmakers to prop up counties whose budgetary woes have gone on for decades by giving them a larger share of new recreational cannabis taxes – generated by the very program which many of those same counties opposed during the legalization fight.
The largest recipient of recreational cannabis tax funds is also the least popular place from which to take money back. According to data released by the Oregon Department of Revenue, in 2018, the Oregon Marijuana Account distributed almost $30 million to the State School Fund. (Oregon Department of Revenue, Oregon Marijuana Tax: Distribution Information, (2019), available at https://www.oregon.gov/DOR/programs/gov-research/Pages/research-marijuana.aspx). While this is significantly more than expected, it is also an extremely small amount as compared to the overall school budget. If this allocation were adjusted down to the projected amount, (roughly half of what it currently hauls in) the funds freed up could be provided to counties for enforcement without a meaningful hit to school coffers. Still, it is a politically difficult proposition.
The State Budget Deficit
The state deficit is nearly $2 billion, driven in part by the enormous PERS deficit. Oregonians’ opposition to sales taxes has combined with effective corporate lobbying against business taxes to make the task of balancing the budget exceedingly difficult. In the grand scheme of things, the impact of reallocating recreational cannabis tax revenue to local jurisdictions that need it to fund better cannabis enforcement would be minimal. Still, in the charged environment surrounding Oregon’s budgetary troubles, efforts to redirect tax revenue from schools – or anywhere else – to support cannabis enforcement have been a tough sell.
In short, rural counties in Oregon need more funds to fight the illegal cannabis market and the Oregon Marijuana Account is the logical source of those funds. But partisan politics, hesitancy to divert funds from current recipients, and the state’s budget deficit are major obstacles to near term reallocation of recreational cannabis tax revenue. Oregon’s legal framework is built around a promise to the federal government and the public that the state will enforce the law against illegal players and licensed businesses that are not in compliance. Rural Oregon does not have the resources to do this. Regardless of how we got here and the arguments against reallocation, the current lack of enforcement activity against the black market is a problem that needs fixing.