Pubdate: Sat, 25 Oct 2014
Source: Wall Street Journal (US)
Copyright: 2014 Dow Jones & Company, Inc.
Author: Zusha Elinson
Cited: Measure 91


HAPPY VALLEY, Ore.-As voters in this state prepare to decide whether
to legalize recreational marijuana, a dispute over taxing the drug is
demonstrating the complexity of transforming a black market into a
legal one.

Drafters of the Oregon initiative, Measure 91, have proposed a state
tax on pot producers that would be lower than those in the first two
states where recreational pot was legalized, Colorado and Washington.
Their aim is to prevent a situation where high prices at authorized
pot shops push buyers to the black market.

But ahead of November's election, dozens of Oregon cities eager for a
piece of the pot-revenue pie, including this quiet suburb outside
Portland, have passed plans for their own local taxes on pot sales,
setting up a possible legal battle if the measure passes.

The squabble underscores how little is known about the appropriate way
to tax legal marijuana, experts say.

"If the tax is too large, then you'll still have the black market,"
said Beau Kilmer, co-director of the RAND Drug Policy Research Center.
"If you have low taxes, you may not get as much revenue as you want."

In Washington and Colorado, tax revenue from recreational marijuana
has so far come in below initial projections. Officials had estimated
that Washington could reap as much as $300 million in the first full
year of sales from taxes and license fees, but now the state's
Economic and Revenue Forecast Council puts that number at about $25
million, while noting substantial increases in later years. Meanwhile,
Colorado anticipated an annual boost of $70 million in taxes alone,
but pulled in $21.8 million in taxes and license fees in the first six

Next month, residents in Alaska and Washington, D.C., also will vote
whether to legalize recreational marijuana for adults over 21. A
majority of Americans say they favor laws allowing adults to buy small
amounts of pot from state-licensed businesses, according to a Wall
Street Journal/NBC News poll released earlier this year.

Backers of legalization in Oregon and Alaska are proposing taxes on
wholesale marijuana by weight that figure to be lower than the
combinations of sales and excise in Colorado and Washington. (The D.C.
measure doesn't address regulation of sales and taxation). The Oregon
measure would result in a roughly 15% tax, while Alaska's would be
21%, according to an analysis by the Tax Foundation in Washington,
D.C. That compares to a 44% effective tax in Washington and around 30%
in Colorado.

Dave Kopilak, a corporate lawyer who helped draft the Oregon measure,
said that setting the tax rate is a "balancing act between maximizing
revenue, discouraging underage use and eliminating the black market."
He said that high taxes in Washington are contributing to high prices
at legal pot shops, making the black market a cheaper

Oregon cities passing their own taxes on pot sales are "undercutting
our goals," he said, adding that the measure would forbid such taxes.

More than 60 Oregon municipalities have passed or proposed local
taxes-most would be 10%-according to the League of Oregon Cities.
Ashland, located near the California border and home of the annual
Oregon Shakespeare Festival, pioneered the tactic earlier this year in
part because the city hopes to cash in on pot tourism, said city
manager Dave Kanner. The ballot measure, as written, doesn't give
enough money to cities, he said, adding that he believes the local
taxes would withstand legal scrutiny.

Measure 91 proposes that 40% of tax proceeds go to a schools fund, 20%
to mental-health and drug services, 15% to state police, and 20% to
counties and cities, depending on the number of licensed marijuana
business. The state legislature could tweak the measure if it passes.

Meanwhile, opponents say that tax revenue isn't worth approving
legalization. People aren't "thinking about the social costs, which
will far outweigh any tax revenue," said Mandi Puckett, director of
the No on Measure 91 campaign.

Just north of the Oregon border in Vancouver, Wash., the proprietor of
a pot shop called New Vansterdam has seen firsthand how the black
market continues to thrive.

Brian Budz, the president of New Vansterdam, said that since the store
opened in July, he has called police three times to report street
dealers outside trying to lure his customers away with lower prices.

The tax scheme in Washington "is not optimized in order to try to bite
into the black market," said Mr. Budz, who previously worked in sales
at Nike. "The way [the Oregon measure] is written, Oregon really has a
shot to go after the black market."

On recent rainy afternoon at New Vansterdam, an eighth of an ounce
(3.5 grams) of marijuana was going for $87 to $128, two or three times
what it costs on the black market or at a medical marijuana
dispensary. Still, there was a steady stream of customers coming
through the store, which is located in a shopping center along with a
Safeway, RadioShack and Weight Watchers. Jason, a 36-year-old who
didn't want his last name used, bought four grams of marijuana,
including one gram of Presidential OG Kush for $42. "You usually can
get an eighth for $40," he said, but added that he appreciated the
convenience of the pot shop. "That's what you're paying for." When
Washington voters went to the polls in 2012, the state's Office of
Financial Management estimated the total revenue generated for the
state in taxes and fees could be as high as $2 billion over five years.

But the state won't be seeing billions any time soon. Pot sales could
fall well short of projections in the first year because of its high
tax rate, competition from medicinal marijuana "and a slow start to
licensing retail stores," Moody's Investors Service said earlier this
year. Just 70 of the planned 334 retail shops have been licensed,
according to state officials.The pot measures in Oregon and Alaska are
expected to be closer than the one in D.C., which has a sizable lead
in pre-election polling. A recent Oregon Public Broadcasting/Fox 12
election survey put the Oregon measure up 52% to 41%, with 7% undecided.

With sales beginning in July, the state's Economic and Revenue
Forecast Council estimates $637 million for the first five years.

Alison Holcomb, primary author of the Washington measure, said it is
too early to say how taxes are affecting the price of marijuana. She
said that the current prices are more a result of a scant supply of
legal pot. Meanwhile, Colorado is on pace to bring in more tax revenue
than Washington in its first year, although it missed some early
projections due to competition from medical marijuana, which is taxed
at a lower rate, according to some experts.

Tim Hibbitts, whose firm conducted the poll, said that although it is
in a position to win, the victory isn't locked down, noting that the
measure could be hurt by lower turnout during the nonpresidential
election year.
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MAP posted-by: Richard