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By Beau R. Whitney, Whitney Economics
While many struggled in 2020 due to COVID-19, the pandemic proved to be a shot in the arm for the Oregon cannabis industry. Retailers experienced record demand for cannabis products.
The Oregon market was a microcosm of the entire U.S., as both experienced a strong year in 2020. Cannabis saw growth in total legal revenues, tax revenues generated, and number of legalized states. The industry, however, also struggled with continued challenges in banking, taxation and trade.
Will these challenges put a damper on the 2020 enthusiasm or was this just the beginning of the inevitable full federal legalization? What is in store for cannabis in 2021?
A 2020 Recap:
The COVID-19 designation of legal cannabis operators as an essential business will have long-lasting positive effects on the industry.
The COVID-19 pandemic could have been a disaster for the cannabis industry and had the potential to displace over 300,000 legal workers nationally (and an estimated 25,000 to 30,000 workers in Oregon alone). By designating cannabis operators as essential businesses, however, Oregon Gov. Kate Brown joined a dozen other states in not only sparing job losses but in ensuring that state coffers received tax revenues.
It was a win-win scenario. For Oregon, this designation resulted in over $750 million in wages being paid. This designation also reduced the perceived social stigma many consumers associated with the cannabis marketplace. It introduced cannabis to a new group of potential consumers.
The COVID demand for cannabis boomed.
Oregon and the U.S. both experienced a surge in demand after business and school lockdowns occurred in March. Oregon has 719 licensed retailers. The average Oregon retailer saw an immediate 20% month over month increase in sales in March and the increased sales continued for much of 2020. Overall, the demand was strong in 2020 and it was sustained.
Much of this surge is related to employees working from home and being able to consume cannabis during working hours. Another factor: the sheer stress of living during a pandemic. The narrative that cannabis sales would decline once unemployment benefits ran out was a false one that incorrectly assumed the typical consumer was poor and employed in the service sector. The consumer relationship with cannabis is much more sophisticated than that.
Cannabis's essential designation was a sound public policy as states were able to benefit from the cannabis tax revenues to partially offset revenue losses from other sources.
While most states saw overall tax revenues decrease, many of these decreases were not as much as originally predicted. Oregon for example, experienced roughly a 5% reduction in tax revenues, even with historically high levels of unemployment. Cannabis taxes helped to partially offset the decrease in overall tax revenues.
Overall, across the U.S., in 2020 states will have collected at least $2.6 billion in cannabis sales tax revenues. Oregon alone is forecasted to collect $175 million in state and county cannabis sales tax revenues during the calendar year. Typically, cannabis taxes represent 0.5% to 1.0% of a states overall budget, so while taxes do not make up very much of the budget, having people employed, paying taxes and not on the public dole proved to be sound public policy.
Political sea changes occurred in 2020, led by increased state legalization and the MORE Act.
The November election saw continued support at the sate level with New Jersey, Montana, South Dakota, Mississippi and Arizona all passing either medical or adult-use legalization ballot measures. This now makes 36 states medically legal of which 15 states are now have legal adult-use access.
The passage of the MORE Act in the U.S. House of Representatives was a watershed moment as it was the first major cannabis reform bill passed by a chamber of the U.S. Congress. Even though its passage in the more conservative Senate is unlikely in the near term, one industry observer called the passage "the first day marking the inevitability of full federal cannabis legalization."
2020 Saw Positives, Yet Challenges Remain:
While there were many positives for the cannabis industry, there were some lingering obstacles that have inhibited the growth of the industry.
Cannabis is local.
While cannabis legalization has passed in more states, cannabis is very much a local issue, with policies set by individual counties and cities. Counties across Oregon, California and elsewhere are enacting moratoriums, making cannabis operations very complex from one state to the next.
In Oregon, Deschutes County is an example of this complexity. While it's fine to sell cannabis products in Bend, cannabis operations are largely prohibited in the unincorporated areas. This dynamic requires retailers to source products over an extended supply line from the western side of the state, limiting product selection and increasing price. Some investor/operators have instead chosen to locate in more cannabis-friendly countries. Medical patients are also impacted.
Marion County is another example where policies allow cannabis operators within the cities but not in the unincorporated areas. You can have cannabis near the capital but not in the county's backyard.
Federal cannabis taxation is crippling to businesses.
Federal IRS Tax Code 280e does not allow cannabis operators to deduct many common business deductions, thereby creating a high level of tax liability. In some cases, at a 60% to 70% effective tax rate, cannabis operators are literally taxed out of business. Oregon alone is seeing state tax delinquencies at an ever-increasing rate (estimated to be approximately $25 million in 2020), in part due to high federal tax liabilities.
The lack of banking for "essential businesses" is resulting in loss of life.
Due to the high cost of compliance and reporting burdens on banks that offer basic services to cannabis operators, banking remains an issue in the U.S. cannabis industry. As such, cannabis remains a cash-based industry, fraught with safety concerns and peril. Portland cannabis worker Michael Arthur, murdered in a robbery early in December, was just one of many cannabis workers who have lost their lives tragically in robberies across the country. Banking reform is long overdue.
Predictions for 2021: A Year with Great Potential
Demand will remain strong when people go back to work, just not COVID-strong.
Consumers have embraced cannabis as part of their lifestyle and have found new forms of delivery types. Although people will eventually go back to work, the demand has evolved and so have the consumers. Overall, Oregon consumers' total spending increased 33% since January. Demand will be lower than the "work from stoned" era, but not fall back to pre-COVID levels.
The demographics of cannabis have shifted in 2020.
The average age of a cannabis user is increasing. While 51% of consumers are millennials, a full 41% of cannabis consumers are Gen X and older. In fact, 16% are baby boomers. During the COVID era, based on a recently published survey, between 20% and 25% of consumers aged 55 and above actually increased their cannabis use over the past year. Now that there is better education, essential business legitimacy and product offerings such as rescue rub balms and transdermal patches, look for more boomers to flex their consumer spending muscle away from prescription painkillers and over to cannabis.
States will look to cannabis and hemp as tools for economic development.
Over 110,000 restaurants and bars in the U.S. have permanently closed due to COVID-related shutdowns. States have already begun to look for ways to increase employment, particularly for those displaced by COVID. Cannabis (and hemp) offer unique opportunities to pay reasonable wages for relatively unskilled work. Portland, for example, has developed policies favorable to BIPOC communities, which benefit both those impacted by the war on drugs as well as those disproportionately displaced by the COVID lockdowns. This economic validation by city and urban planners is an untapped opportunity that will come to light in 2021.
Federal reform will be incremental, with research, commerce and banking at the forefront.
Cannabis banking had bipartisan support in both chambers of Congress in 2020 but was impacted by governing dysfunction and the election. As the new Biden administration takes over, cannabis banking is one of the most logical places for incremental reform. Reform will first take hold in medical research and insurance and grow from there. In addition, interstate commerce may enter into the cannabis reform equation as a means to generate new jobs and taxes.
Governors in California and Colorado have (quietly) supported the concept of interstate compacts, looking to Oregon as the pioneer in this area. Oregon was the first state in the country to pass laws allowing interstate cannabis commerce under certain conditions. Federal reform may be driven by states—up to 10 additional states may debate legalization in 2021.
The industry will respond to federal reform with great product innovations and multistate operators.
As more states come on line, large, well-funded multistate operators will become more active nationally. Those with strong supply chains management, branding and scale will have the upper hand; unfortunately, this may come at the cost of smaller mom-and-pops. Given the industry is approaching $20 billion in legal sales, cannabis is big business.
While there is a shift toward legal demand, do not underestimate the illicit response.
The illicit market is still thriving. Nearly 80% of demand in the U.S. is supported by the illicit market, much of the exports coming from the West Coast states. While the demand for legal cannabis is increasing, until there is interstate commerce or full federal legalization, the illicit suppliers will remain quite formidable, even after legalization occurs.
Cannabis is a global industry, and the pace of reform is accelerating.
Cannabis reform is accelerating globally. No fewer than 50 countries already have access to legal cannabis in some form, and the list is growing. The U.S. is poised to either become the world's leading market or be left behind. The U.S. has already ceded the global position to Canada, by keeping cannabis illegal. With Mexico's legalization imminent, the U.S. may be the only country in North America without legal adult-use access. U.S. competitiveness will depend upon changes to cannabis policy at the federal level.
Will 2021 be the year for full federal legalization? Probably not. But there is a momentum not seen in years past. Look for this momentum to accelerate in 2021, for policy to change incrementally, and for the industry to have another year of positive growth and development.
Beau Whitney is the founder and chief economist at Portland-based Whitney Economics, a global leader in cannabis and hemp business consulting and economic research. He is considered one of the leading cannabis economists in the U.S. and globally.