Marijuana Revenue: Oregon 2014

The Oregon Legislature took a hard look at marijuana legalization in early 2014, but failed to act. So November voters may get to choose between legalization initiatives with dueling revenue ideas.
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The Oregon Legislature took a hard look at marijuana legalization in early 2014, but failed to act. So November voters may get to choose between legalization initiatives with dueling revenue ideas. The Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act (CRTMIHA) puts marijuana commerce in the hands of private sellers -- and taxes it modestly. The Oregon Cannabis Tax Act of 2014 (OCTA) lets the state make big profits from monopoly sales.

CRTMIHA taxes marijuana by weight. Per-ounce rates are $35 for "flowers" and $10 for "trim." Seedlings bear a different tax -- $5 each. (CRTMIHA partly indexes dollar amounts. Strangely, only 25 percent of inflation gets counted in adjusting tax rates. That kinda-sorta adjustment comes from Oregon's existing tax on moist snuff -- really.)

Why different taxes for flowers and trim? Flowers contain more THC, marijuana's primary intoxicant, than trim, so they bear more tax. That's like the federal alcohol tax: An ounce of hard liquor contains more alcohol than an ounce of beer, so it bears more federal tax. And the higher the proof (alcohol percentage) of liquor, the higher the federal tax. So why not just tax THC content directly, like alcohol in whiskey? Because marijuana is not homogenous enough. Different testing labs report wildly different amounts of THC from similar samples. CRTMIHA's different rates for flowers and trim may be a good proxy for taxing THC.

Per-ounce wholesale taxes of $17.59 for flowers and $2.78 for trim -- and a $9 seedling tax -- are already being collected in Colorado. Those Colorado per-ounce rates are lower than CRTMIHA's, but Colorado adds a separate, lucrative retail tax, projected to bring in more revenue than its wholesale taxes. CRTMIHA's tax burden on marijuana seems modest -- and it will be less, in percentage terms, than total Oregon and federal taxes on cigarettes. Tax burdens in Oregon, once enacted, can't go up without 3/5 supermajorities in both Houses of the Legislature. But low taxes at first can help legal operators win the inevitable price war against entrenched bootleggers -- if not against tax-free medical marijuana.

OCTA takes a completely different approach. Forget "Tax" in the title "Oregon Cannabis Tax Act"; revenue would instead come from profits from monopoly sales of marijuana by the state.

OCTA's monopoly plan starts with, but improves on, a 2012 predecessor Initiative that failed. That 2012 Initiative included a deal-killer for cautious voters: On a seven-member Commission selling marijuana and setting prices, "licensed growers and processors" would have had five seats. Henhouse, meet fox. That industry-controlled Commission was criticized, and even ridiculed. Still, 47 percent of Oregon voters said yes to that sketchy 2012 Initiative.

This year's OCTA eliminates that problem of industry domination. There's still a Commission with seven members, but now the governor appoints all seven, for short-fused, one-year terms. For the common good, that's going from an F to an A.

There's still a major problem with OCTA, though. The Initiative calls on the Commission, a state actor, to sell marijuana. Possessing and selling marijuana are still illegal under federal law. Under OCTA, the state would be violating federal law itself -- just as if state employees filled in federally protected wetlands. To be sure, the federal government likely wouldn't prosecute state agents for selling marijuana. But courts could find that the Commission's operations preempt federal law -- and block them. Because of federal illegality, no U.S. state even lets its laboratories perform tests on marijuana; no other state is thinking of hiring cashiers to sell it.

But OCTA's conflict with federal law could be toned down. It turns out that amending laws passed by initiative in Oregon is relatively easy. (Some other states can't change initiative-passed laws without a legislative supermajority, a waiting period, or a voter approval.) If OCTA 2014 passes, the Legislature could address the problem -- by stopping state sales. It could remove the functions of possessing and selling from the Commission, and transfer them to contractors. The seven-member Commission could still set prices. Constitutionally, that plan may be no more provocative than the local marijuana taxes collected in Oakland, California, since 2010, and the state excises already collected in Colorado this year.

In any event, OCTA is unusually generous to the public: Of every dollar paid by consumers for retail marijuana, Oregon gets 85 cents, and private contractors, chosen by that seven-member Commission, get 15 cents. If you put that state share in terms of a tax rate, it's 85 percent of the total after-tax price, up there in the range of cigarette tax rates in Europe. It's way above the marijuana rates in Colorado and Washington.

Will OCTA prove too generous? Even if the state can shut down flagrant bootlegging, competition from untaxed, legal medical marijuana could make collecting so much revenue an uphill battle. The Legislature may have to come to the rescue.

We are just starting to look at the menu of options for marijuana revenue. In Oregon in 2014, CRTMIHA's private enterprise plan offers voters a taste of revenue, while OCTA's monopoly promises a banquet. But whatever voters order, they may find that the Oregon Legislature eventually decides to cook up something else instead.

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