New York’s Road to Legalized Marijuana

Tax Policy – New York’s Road to Legalized Marijuana

New York Governor Andrew Cuomo (D) has become an avid supporter of legalized recreational marijuana and has vowed to legalize it this year. This is the second year in a row Gov. Cuomo has included legalization in his budget. In 2019, the measure was eventually taken out of the budget, despite support among voters, as lawmakers could not agree on spending priorities. It is projected that a legalized market could raise $300 million a year when the market is fully developed but is only forecast to raise $20 million in fiscal year 2021.  

New York lawmakers would be right to act with caution in divvying up revenue from the sale of marijuana. The lesson from other states is that revenue estimates rarely live up to expectations. Legal marijuana is an insufficiently reliable source of revenue to fund essential programs. While it can be part of the revenue picture, tax collections from the sale of marijuana should be spent at least in part on building and enforcing the new marijuana regulatory system and should not be expected to play a major role in closing New York’s projected $6 billion budget shortfall.

Legalization in New York hangs in the balance, as the global COVID-19 pandemic has sped up the process for passing the state’s budget and refocused priorities. The budget deadline is normally April 1, but lawmakers are expected to vote on it earlier. Gov. Cuomo’s strategy has been to legalize through the budget as he is skeptical of the prospects of legalizing through legislation. Senator Liz Krueger (D), the sponsor of one legalization bill, said that negotiating a final bill would be difficult.

In the budget, the governor proposes a mixed excise tax system. The cultivation would be taxed at $1 per dry weight gram of flower, $0.25 per dry weight gram of the trim, and $0.14 per gram of wet cannabis. The sale to a retail dispensary would be taxed at a rate of 20 percent of the wholesale price. An additional 2 percent wholesale rate would be imposed for the benefit of the county in which the dispensary is located.

Sen. Krueger’s bill remains in the Senate Finance Committee. This bill would tax sales at the retail level at a rate of 18 percent. Additionally, it includes a 1 percent tax on sales to dispensaries, which would go to the county where the dispensary is located, and a 3 percent tax which would go to the city, town, or village where the dispensary is located.

Both proposals seem inspired by other states that have legalized recreational marijuana (see table below). The trend has been to levy the excise tax based on prices (ad valorem), likely due to the complexity of the marijuana market. Marijuana products come in all shapes, sizes, and strength (potency). Taxation should be aimed at the externality, which is best expressed by the THC-level (THC is the main psychoactive compound in marijuana). While price could technically act as a proxy for the strength of the products, it is far from a perfect solution.

Such ad valorem excise taxes are neither neutral, simple, nor stable. While excise taxes are generally designed to capture the cost of externalities arising from the activity being taxed, these taxes can treat similar products inequitably, as it is based on prices, which do not correspond to harms. They also add complexity for vertically integrated companies, which are forced to estimate a taxable value as no actual transaction takes place as the product moves through the value chain. Furthermore, they are sensitive to price fluctuations, which is a particular issue for marijuana as it is a developing and volatile market.

Regardless of whether New York legalizes marijuana in 2020, the debate over appropriate taxation will continue. Marijuana taxes have not seen their final form and more work on developing a principled tax system for recreational marijuana is needed.

Source: Tax Policy – New York’s Road to Legalized Marijuana