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State eyes changes to pot industry as sales soar

Marijuana starts at a growing facility in Seattle.
Marijuana starts at a growing facility in Seattle.

Recreational marijuana sales continue surging to new heights throughout Washington this spring as state lawmakers inch toward reshaping the young industry.

Many legislators also see the industry as a solution to the state’s budget woes. Yet some, like Rep. Reuven Carlyle, D-Seattle, are worried too many lawmakers have become addicted to the idea of gleaning tax revenue from pot.

“My concern as Finance chair is that we have created a broad public expectation that marijuana revenues are manna from Heaven without implication or consequence,” Carlyle recently wrote.

May was yet another record-breaking month for cash flow across the industry, as Washington’s recreational marijuana market racked up nearly $41.5 million in sales. That hefty sum also meant lots of new tax revenue for the state: more than $10.3 million worth from May alone.

Sales have increased month over month, despite a small decline in marijuana production in December. Since the first stores opened last July, the industry has done more than $215 million in sales, generating nearly $53.8 million in tax revenue, according to the Washington State Liquor Control Board.

For now, the system works fine for the biggest stores in the state, including Vancouver’s Main Street Marijuana and New Vansterdam stores, both of which surpassed the $1 million mark for sales in May. But the tax structure — 25 percent applied three times over from grower to retailer — has left many smaller growers and stores struggling to stay afloat.

Jim Mullen, who co-owns both locations of The Herbery in Vancouver, is one of many in the industry keeping a close eye on Olympia as lawmakers are preparing a major shift in the state’s marijuana tax structure. For Mullen’s stores, changing the tax rates could be the difference between life and death.

“There’s a ton of revenue being generated, but as far as whose bank accounts it’s going into, it seems to be the state is getting its fair share and a lot of the business owners I know are still watching every penny,” Mullen said. “We hope that changes quickly because that’ll definitely change our viability.”

That difference maker appears to be House Bill 2136. Among the many changes the bill would make, it would replace the three-tiered 25 percent tax system with a new, higher tax charged only to retailers when they buy their marijuana from growers.

Though the tax rate would be higher for retailers, it would allow businesses on the production end to drop their prices, alleviating some of the burden on store owners.

“To us, being taxed on the excise taxes is what’s really killing the industry,” Mullen said.

In Olympia, lawmakers’ to-do list is long and presumably their time is short. Currently in a second special session, legislators must agree on a two-year operating budget by the end of the month or face a partial government shutdown.

Embroiled in the end budget game is the future of the state’s recreational marijuana market, and the question about the appropriate tax rate is central to the discussion.

Democrats have blasted Republicans for relying too heavily on optimistic marijuana tax revenues to balance the budget, a move they have criticized as gimmicky and not sustainable. Republicans are “taxing sin at a level so off the chart, it becomes monopoly money,” Carlyle said.

But both sides agree they would like to crack down on the illicit black market, and that a key way to accomplish that goal is to change the marijuana tax structure.

While the House bill proposes a 30 percent tax rate, Carlyle said the Senate proposal would tax recreational marijuana at 37 percent plus sales tax and medical marijuana at 37 percent with no sales tax.

“We’ve moved toward the Senate, we raised recreational to 37 percent, plus excise,” Carlyle said. “But we feel authorized medical patients having to pay the additional 7 percent plus sales tax puts it over the top.”

Another sticking point is the issue of pre-emption, he said. The House bill would share some of the tax revenue with cities and counties. But Democrats don’t believe any place with a ban or moratorium on marijuana businesses should get a portion of the revenue.

Sen. Ann Rivers, R-La Center, a key lawmaker negotiating HB 2136, criticized the House’s approach.

“The House has loudly complained about the unpredictability of marijuana revenue, while quietly giving pot smokers a tax break,” Rivers said in a statement. “The Senate has been working hard to include a tax break for low-income seniors and protect small businesses from tax hikes, while the House has been handing pot smokers a sweet deal. Where are their priorities?”

– Lauren Dake and Justin Runquist