The Lure of Local Cannabis Revenue

The promise of cannabis tax revenue has featured prominently in numerous state campaigns as a reason to support legalization, and recent polling in New Jersey shows that potential tax revenue is the top reason voters there claim to support the idea. However, there has been little direct evidence of just how much the promise of revenue really moves voters.

But here is another piece of the puzzle: A Cannabis Wire analysis of how more than 200 Oregon precincts voted on marijuana legalization in 2014 compared to how those same precincts voted on local cannabis business bans in 2016 shows how the possibility of marijuana tax revenue may have contributed to a dramatic shift in voting behavior.

In 2014, Oregon voters passed a marijuana legalization initiative that would share some of the state’s marijuana tax revenue with counties and cities that allow marijuana businesses. After the measure passed, the state legislature modified the law in several important ways. First, the lawmakers required that most cities and counties in the state that wanted to ban local marijuana businesses would need to put the issue on the general election ballot, and let the local voters decide. (This applied to jurisdictions where fewer than 55 percent of voters opposed legalization.) They also let localities adopt up to an additional 3 percent marijuana tax if they also put the tax on the same general election ballot. This meant that if they allowed cannabis businesses, localities could tap marijuana revenue in two ways—first, by simply allowing recreational marijuana businesses, thus getting a share of the state’s general cannabis revenue, and additionally by creating a specifically local tax.

The following chart with data shows how more than 200 precincts voted on legalizing marijuana in 2014, compared to how they voted on whether to allow local marijuana businesses in 2016. Overall there’s a strong correlation, but there are a few important outliers highlighted in red and blue.

The red dots represent Gilliam County, Halfway, Milton-Freewater, and Pendleton. These localities all overwhelmingly voted against making marijuana legal in 2014 but placed both a local ban and a local tax on the 2016 ballot after the localities around them had already banned marijuana businesses. Thus, voters in these localities could know that by allowing cannabis shops they would be positioned to receive a disproportionately large windfall—in part because they would be one of the few in their vicinity to offer cannabis, and in part because of the additional tax possibility.

These communities all saw a stark shift toward a pro-marijuana position in 2016. The weighted average was a 12.6 percentage point pro-marijuana shift in the 2016 local ban vote compared to the 2014 legalization vote. This suggests that people who opposed legalization in 2014 were willing to let such businesses in their community in exchange for tax revenues in 2016. In the past year, the Oregon Department of Revenue has dispersed $29 million of Oregon state cannabis tax revenue to local governments that allow cannabis businesses. The Department of Revenue has also distributed an additional $13 million in local cannabis taxes to the counties and cities who opted for the department to collect those taxes on their behalf, which many did.

On the other side of the spectrum, the blue dots are precincts in cities in Clackamas County, a relatively wealthy county in the suburbs of Portland that has some unique qualities that may have shaped voting. A small relatively dense part of the county near the major population centers has remained unincorporated, and by 2016 it had several marijuana dispensaries subject to a county marijuana tax. Most other Oregon counties feature no dispensaries in their unincorporated areas. This meant that in 2016 voters in these cities in Clackamas County were in a special position: they alone in Oregon could vote to ban marijuana businesses in direct their neighborhoods but still benefit from both significant state and local marijuana tax revenue thanks to this small unincorporated zone.

Some cities in Clackamas County put a city-wide marijuana tax on the ballot, and some did not but still put forth the ban question. And having a tax on the ballot at the same time as a ban made a big difference: Precincts with a tax on the ballot voted identically on a local marijuana ban as they did on legalization in 2014. Yet in the precincts without a city marijuana tax, voters opposed local marijuana businesses by 15.4 percentage points more than they opposed legalization in 2014. This strongly implies that if cities don’t have a financial incentive, they will happily adopt a not-in-my-backyard position.

Just how to tax cannabis is a big question. The exact size and structure of marijuana taxes is important not just because it generates revenue. In addition, we know the design of these taxes plays a significant role in public health issues, such as the extent of marijuana use and the size of the black market. The higher taxes are, the more likely it is that individuals will try to stay outside the regulated system and thus support a black market. But high taxes can also reduce use, a tactic used with cigarettes. Lawmakers must navigate this delicate balance.

The Oregon case study indicates how differing approaches to the marijuana tax question can also play a powerful political function. If states give localities that allow cannabis businesses  a share in marijuana tax revenue, it seems likely that marijuana businesses will be permitted in more communities. And if they don’t, we could see even communities that support legalization prohibit marijuana businesses. You could have a situation where marijuana is legal in a state, but recreational stores are confined to just a few areas, leaving much of a state without any access.

This important question is being debated right now at a local and state level on the other side of the country. In Massachusetts, numerous communities are voting on local marijuana bans, while New Jersey is debating just how to craft its legalization legislation. How those places structure taxes may help shape the outcomes.

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