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Oregon’s cities and counties can currently levy a maximum local cannabis sales tax of 3%, but after some municipalities lobbied for higher taxes, the state Legislature is considering a bill that would allow local governments to raise the cannabis sales tax to 10%.

Senate Bill 1506, introduced Feb. 1 by Sen. Lynn Findley and Rep. Mark Owens, received a public hearing in the Senate Committee on Finance and Revenue Feb. 7.

If ultimately passed, the legislation would raise the total sales tax on cannabis from 20% to 27% when including the state tax rate.

The Oregon Retailers of Cannabis Association (ORCA) has come out in strong opposition of S.B. 1506, and the organization sent an email to its members Feb. 9 to urge them to contact their state leaders to express their concerns about the legislation.

“ORCA has submitted testimony in strong opposition to the bill—but we need as many of you as possible to contact leaders in state government to make sure they know that this bill would be extremely harmful to Oregonians,” the group wrote in the email.

ORCA Executive Director Casey Houlihan said S.B. 1506 is a reintroduction of a 2021 proposal, and lawmakers have carefully crafted the legislation so that it does not create or raise a tax, but rather gives local governments the option to increase the sales tax on cannabis.

“In Oregon, in order to pass a new tax of any kind, you’re required to have your bill pass with a three-fifths majority through the Legislature,” Houlihan told Cannabis Business Times. “It’s a very high threshold and it’s very difficult to pass a new tax, typically. However, because this bill does not explicitly create or raise a new tax, it is not subject to that three-fifths majority requirement. It’s only subject to a simple majority requirement because it gives localities the option to raise their local tax. It does not in and of itself raise a tax.”

In the 2020 election, Oregon voters approved Measure 110 to decriminalize the possession of personal amounts of all illicit drugs, and the initiative created drug addiction treatment services that are funded, in part, by cannabis tax revenue. The funding earmarked for these programs took tax revenue away from Oregon’s cities and counties, Houlihan said, leaving many local governments with budget shortfalls.

“That created a backlash among people, especially in the eastern portion of the state, areas where a lot of small towns are really doing quite well, bringing in lots of local revenue from the Idaho cannabis market, [where] people [are] driving across the country to buy cannabis in Ontario or other parts of Eastern Oregon,” he said. “They’re a big fan of that tax revenue now, so they’re trying to increase that as much as possible.”

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Steven Meland, co-owner of Ontario, Ore.-based dispensary Hotbox Farms, said his city lobbied for S.B. 1506 in Salem.

“Our city purchased a lobbyist to lobby for the bill and help really craft that bill, so a lot of it comes from our local leaders here wanting more tax revenue, even though they’re already getting several million dollars a year, just from their 3% [in sales tax],” Meland said. “We’ve been pretty opposed to it. I think the industry here is certainly worried about the bill.”

“It’s actually one of the things that’s made this fight more real because local lawmakers [and] local elected officials are turning up at the capitol and saying, ‘Hey, you guys changed our budget and now you are responsible for backfilling it,’” Houlihan said. “It’s been a compelling argument, so we’re worried about there being traction behind this particular effort.”

Meland and Houlihan are concerned that increased taxes could price some consumers out of the regulated marketplace, sending them back to the illicit market.

“One of the biggest things is, as we’ve seen in other states like California, when the tax increases, all of these black-market competitors start to get the upper hand again and really start to take back the market from the regulated industry,” Meland said. “Then, we have all the problems of unsafe product and untested product and those types of things.”

“We’ve put a lot of time and effort and energy into trying to build up this legal market, and what we’re seeing from economic analysts in the industry right now is that upwards of 15% to 17% of folks might end up reverting back to the illicit market in the event that we saw that dramatic of a sales tax increase here,” Houlihan added.

Those using cannabis medicinally may also be affected by a tax increase, Meland added.

While patients enrolled in Oregon’s medical cannabis program do not pay tax on their purchases at the state’s dispensaries, the burden of fees for medical cannabis cards and the requirements of the medical program has caused declining patient numbers in the state, meaning that these former patients are now likely purchasing their medicine in the adult-use market.

“We know that those people didn’t just stop becoming patients or stop needing cannabis for medicine,” Meland said. “What they’ve done is just moved to the recreational side of things to make sure that they can get their medicine. So, even though people aren’t maybe designated as being a card carrier, a vast majority of people we see coming into our store are telling us they’re using it as a medical product.”

Oregon’s cannabis industry is already struggling to thrive with an oversupply of cannabis, he added, and many smaller, mom-and-pop businesses are closing their doors. An additional tax, he said, will only exacerbate this issue.

“It’s one of those compounding issues where, where does it stop if every time they need money, they have to come back to cannabis and try to put that on the back of the cannabis industry?” Meland questioned. “Where does it stop and where does it break the industry?”

And, Meland added, the tax increase may not even bring in the revenue that Oregon’s municipalities are projecting, if the higher prices drive consumers back to the illicit market.

“I think what will actually happen is people will, unfortunately, go look for other means of finding cannabis in the unregulated industry,” he said. “I think they’re completely forgetting the fact that the consumer has a choice, and the consumer will make that choice with their wallet. Unfortunately, that means that they’ll cut themselves out of the tax altogether.”

Lawmakers must also think ahead to federal legalization, Houlihan said. Comprehensive legalization proposals such as the Marijuana Opportunity Reinvestment and Expungement (MORE) Act and the Cannabis Administration and Opportunity Act (CAOA) would likely add a new layer of taxation at the federal level. Then, there will also be the question of interstate commerce and export taxes on cannabis.

“There may be opportunities for additional tax revenue for people in the state of Oregon without additional taxes for Oregon consumers,” Houlihan said. “But that’s the level of nuance that Oregon lawmakers need to approach this with, not just, ‘OK, we already have a percentage of the sales tax—let’s just increase the percentage.’ They need to think about this more holistically and what kind of funding mechanisms might be appropriate and which ones do and do not lead to increased costs for in-state consumers.”

S.B. 1506 must first pass out of committee before heading to the Senate floor for a vote, and Houlihan said cannabis industry stakeholders have been very vocal about the bill in Salem.

“Cannabis businesses and cannabis consumers alike have been very active in their outreach to legislators, and they’ve made it very clear that this isn’t something that they can tolerate, this is not something that the industry can bear, [and] this is not something that consumers are interested in paying for,” he said. “My understanding is that, based on that feedback from constituents, the bill is very unlikely to move this year.”

However, some iteration of a cannabis sales tax measure has been considered in the Oregon Legislature for the past five or six years, Houlihan said, and this year’s proposal to allow municipalities to increase cannabis taxes is just one of many that he is prepared to fight.

“Our concern extends beyond this short-lived legislative session,” he said. “Our concern extends into next year and any momentum that they might gain to reintroducing this in 2023. We’re thinking about this in terms of how can we kill this bill for this year, but also how can we disrupt the momentum of this conversation long-term?”

Oregon’s 2022 legislative session runs through March 7 and S.B. 1506 has yet to pass out of committee.

“We’ve made so many leaps and bounds to try to have a safe, regulated market and really make the consumer comfortable with believing and trusting in that market,” Meland said. “Then, for them to just try to undo all of that work that we’ve all done, it certainly seems like a step in the wrong direction.”