The border effect happens when a product that is regulated differently in a neighboring state experiences a drop in sales for that product because consumers cross the state line to purchase it in the state where laws are more favorable. In the marijuana industry, the border effect has risen as different states with different laws open doors for consumers to purchase marijuana more easily and affordably.
The border effect is not a new phenomenon. It’s been happening with alcohol, gambling, and cigarettes for a very long time. Whether consumers are crossing a border to buy alcohol on Sundays because they can’t purchase it on Sundays in their own states or they’re crossing the border to buy cigarettes in a state where taxes are lower, the border effect can have a significant impact on retailers’ revenues. Most recently, marijuana retailers in Washington State have been feeling the squeeze from the border effect. Let’s take a closer look.
Crossing the Border from Washington to Oregon to Buy Marijuana
In October 2015, recreational marijuana sales went into effect in Oregon. Suddenly, Oregon residents didn’t have to cross the border to make their purchases in Washington where recreational marijuana was already legal. According to the Washington State Economic and Revenue Forecast Counsel, Oregon’s legalization of recreational marijuana has had a direct and significant impact on marijuana sales at retailer locations near the Washington-Oregon border.
For example, Josh Lehner of Oregon Economic Analysis reports that in Clark County, Washington, marijuana sales dropped from over $400,000 in July 2015 to under $250,000 in October 2015 when it was legalized for recreational use in Oregon. Before October 2015, Clark County was responsible for 12% of Washington’s marijuana sales, but in October 2015, the county dropped to just 7% of statewide sales.
A drop in sales equates to a drop in tax collections for Washington State. Tax collections in counties that border Oregon, particularly around Portland, OR, dropped by 35% after marijuana was legalized for recreational use in Oregon. Compare those tax collections to the Seattle area where there was an increase of 25% during the same time period, and it’s clear that the border effect is strong between Washington and Oregon.
Not only do consumers no longer have to cross the border from Washington to Oregon to purchase recreational marijuana anymore, but they can also pay less money for it in Oregon. In fact, the difference will get even greater in the coming months. That’s because the tax rate paid by consumers on marijuana sales in Oregon (25%) is lower than the Washington tax rate (37%), but Oregon’s tax rates will drop even lower to between 17% and 20% later this year. For consumers who live and work near the Washington-Oregon border, there is plenty of incentive to make all of their marijuana purchases in Oregon.
Interestingly, Washington and Oregon experience similar border effects in both the liquor and cigarettes industries. Noelle Crombie of The Oregonian reports that Oregon’s liquor and cigarette taxes are both lower than Washington’s liquor and cigarette taxes. Historical sales data shows that the tax difference contributes to a strong border effect in both industries.
How the Border Effect Impacts Marijuana License Values
Clearly, the value of a marijuana license for a retailer located on the border of a state that has less appealing regulations for buyers and sellers is more valuable than a license across the border in the state with less favorable laws. More sales and lower taxes equates to higher revenues for the marijuana retailers in the “right” state. These are the retailers that benefit from the border effect.
Until laws match between bordering states (and that isn’t going to happen anytime soon), the border effect will remain strong in the marijuana industry. Retailers on the “wrong” side of the border will struggle not only with sales but also with watching the value of their marijuana licenses drop.