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Legal cannabis could pay big for New York 

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Marijuana was once viewed by many as a social scourge — the illicit vice of hippies, social outcasts, and unmotivated slackers. But times have changed.

The devil’s lettuce is reviled no more. Polls from both Gallup and Pew Charitable trusts show two-thirds of Americans support the legalization of cannabis, up from around a quarter of Americans when President Ronald Regan escalated the nation’s war on drugs.

Cannabis is now a growing medical and recreational industry that generates about $15 billion a year in annual sales and rising. Those sales provide tax revenue to governments while generating broader economic activity, such as job creation and an influx of new spending in communities.

Legal pot could be an economic boon for New York — essentially bringing an underground agricultural and retail industry to the surface. As lawmakers have publicly made the case for legalizing marijuana for adult use, they’ve had glints of green in their eyes.
click to enlarge Adam Goers, senior vice president of corporate affairs for Columbia Care - PHOTO PROVIDED
  • PHOTO PROVIDED
  • Adam Goers, senior vice president of corporate affairs for Columbia Care

“What we do know is New York is the largest illicit cannabis market in the country and the competition for either medical operators or new social equity dispensaries and producers in the state, of which there will be many, is really ultimately capturing that marketplace and bringing it into the regulated environment, said Adam Goers, senior vice president of corporate affairs for Columbia Care, the company that operates one of Rochester’s medical cannabis dispensaries.

When Gov. Andrew Cuomo unveiled his 2021-22 budget proposal, the bill he submitted to legalize recreational marijuana projected that legal weed could net the state over $300 million a year in tax revenue once the marketplace is fully operational. A competing legislative proposal, sponsored by Assembly member Crystal Peoples-Stokes of Buffalo and Senator Liz Krueger of Manhattan, projected tax revenue could reach $430 million.

For a state that faced a multibillion dollar deficit due to the COVID-19 pandemic’s economic fallout, the new revenue stream has proved enticing. Local governments,
who have their own budget struggles, are also eager to cash in on legal pot. A deal reached by Cuomo and legislative leaders would place a 4 percent sales tax on marijuana retail purchases, the revenue from which would be returned to local governments.

When Rochester Mayor Lovely Warren delivered her State of the City in January, she proposed using $2 million to $5 million in expected marijuana tax revenue to fund an emergency grants program and a Housing First Trust Fund to assist in
the development of quality housing as well as provide emergency rental aid and housing court services.

But how accurate are the state’s revenue projections? Legal cannabis would be a wholly new industry in New York and officials don’t have historical sales data to reference.

As they worked to put numbers to their plans, they looked at sales trends in places like Colorado, Washington, and Oregon, the states that pioneered legal weed and generally strike a good balance between taxes and maintaining a competitive marketplace, as well as licensing and supply.

Many researchers, industry experts, and legalization supporters have said that if anything, New York officials are lowballing their projections. But they’ve also noted that the success of a legal cannabis market and industry in New York will depend on several factors, including the state’s tax structure, the accessibility of licenses to businesses in various parts of the supply chain, and the regulations the state would put into place.

Columbia Care is an indication that New York could have a robust legal marijuana marketplace. The company, which operates in 12 states and Washington D.C., has started its own line of recreational products. Goers said he thinks Columbia Care has a role to play in helping New York get its legal cannabis marketplace up and running swiftly, and in helping New Yorkers start cannabis businesses.

THE CANNABIS PAYOUT

The aim of cannabis legalization in New York is two-pronged. First and foremost, legalization is intended to undercut the established, illicit marijuana market. Of even greater importance to legislators and many cannabis advocates, though, is using the legal marketplace to address the harms caused primarily to communities of color by decades of marijuana criminalization.

click to enlarge Morgan Fox, media relations director for the Colorado-based National Cannabis Industry Association. - PHOTO PROVIDED
  • PHOTO PROVIDED
  • Morgan Fox, media relations director for the Colorado-based National Cannabis Industry Association.
"The overarching purpose is to stop punishing people for using a substance that's objectively safer than alcohol and to make this substance much safer and regulated than it is,” said Morgan Fox, media relations director for the Colorado-based National Cannabis Industry Association.

But legalization comes with fringe benefits in the form of jobs, tax revenues, and, as Fox put it, bringing an unregulated market into the open “where there can be much closer oversight and where you can contribute to legitimate business creation.”

A pair of studies, one from 2019 and another released in February, found that a legal, regulated cannabis industry in New York could create tens of thousands of jobs and surpass the economic impact of the state’s 440 licensed breweries, which the New York State Brewers Association estimates at $3.4 billion a year.

Both build on a 2018 state Department of Health report that used data from Washington and Colorado, as well as drug use data from a national survey, to conclude that New York’s market for recreational marijuana could be between $1.7 billion and $3.5 billion a year.

That report explained that cannabis firms would do business with other suppliers and they’d pay state taxes, while employees would also pay state taxes in addition to spending their earnings doing things that people do — buy houses, go to movies, take vacations.

The SUNY Rockefeller Institute of Government, which was the source of the 2019 study, figured a recreational cannabis market on the low end of $1.7 billion would directly employ 21,080 people in cultivation facilities, manufacturing, testing labs, and retail dispensaries, and would generate $4 billion in total economic output. A market on the high end of $3.5 billion could employ 43,400 people and generate $8.4 billion in economic activity, researchers found.

A report released in February, authored by James Parrott, director of economic and fiscal policies for New York City affairs at the New School, and Michele Mattingly, a labor market economics consultant, reached similar conclusions. The study was funded by Scott’s Miracle-Gro, a consumer lawn care and gardening products company that is unabashedly pro-cannabis legalization.

Of note, that study projected that for every $100 million in taxes the state collects on marijuana sales, an additional $30 million in state and local income, property, and sales taxes are generated.

The beer biz and a legal cannabis industry would differ in one very significant way. Unlike marijuana, beer is legal under federal law, so brewers can sell their products and procure key supplies from across state lines.

“The cannabis industry cannot cross state lines,” Laura Schultz, Rockefeller Institute of Government’s executive director of research and the author of its 2019 study, explained in a recent interview. “So everything in the supply chain has to be produced in New York, which means none of that economic impact can trickle out.”

The federal status of marijuana would also buffer New York’s cannabis industry from legal recreational pot markets in Massachusetts and New Jersey.
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WHAT COULD GO WRONG? A LESSON FROM CALIFORNIA

If state lawmakers try to turn legalization into a blatant money grab, which Cuomo has been accused of doing, legal observers say they’d likely undermine their efforts to establish a thriving regulated cannabis market and a long-term revenue stream.

“You can’t look at it right now as the savior for the New York state budget because of COVID, it’s just not the right case” said Jason Klimek, an attorney with Boylan Code in Rochester who specializes in, among other things, cannabis law and tax law. “It’s going to take years for the market to stand up, get on its feet.”

Setting taxes too high, or nickel-and-diming growers, producers, and sellers, could push cannabis prices higher than consumers are willing to pay. Sticker shock could send recreational cannabis buyers right back to black-market dealers, as could a lack of predictability around what, if anything, they’ll be able to find on dispensary shelves.

“The problem is, this isn’t like another good where there isn’t a really good substitute,” Klimek said. “Let’s just say the price of alcohol gets unreasonable, most people are probably not going to set up brewing operations, and there’s not a huge black market for bootlegging. But there is for cannabis.”

These are all problems plaguing California’s relatively young legal cannabis market, which is considered the largest in the United States.

As that state moved toward legalization, government officials projected sales of recreational cannabis would generate annual tax revenues of somewhere between the "high several hundred millions" of dollars to just over $1 billion. The first two calendar years in which sales were legal, revenue fell short of that projection, though in 2020 sales increased significantly and the state cleared $1 billion in excise, cultivation, and sales taxes.

“It is believed that California’s effective tax rate of around 40 percent was too high to draw consumers away from the illicit market,” the Parrott and Mattingly study found.

click to enlarge Laura Schultz, executive director of research at SUNY Rockefeller Institute of Government. - PHOTO PROVIDED
  • PHOTO PROVIDED
  • Laura Schultz, executive director of research at SUNY Rockefeller Institute of Government.
Additionally, three quarters of California’s cities and one-fifth of its counties prohibited cannabis dispensaries. And some looking to enter the industry haven’t been able to secure licenses due to bureaucratic delays and the compounding costs associated with them.

The result: while California’s government is making money off of legal marijuana, the state’s black market has continued to thrive. The firms BDS Analytics and Arcview Market Research reportedly estimated that in 2019 that illicit cannabis sellers made $8.7 billion while legal retailers made $3.1 billion.

“They basically created a structure that gave no incentive to go legal,” Schultz said.

THE EXCEPTION, NOT THE RULE

A benefit to New York arriving relatively late to legalization is learning from the mistakes and success of states that got there earlier.

How marijuana will be taxed is outlined in the proposal agreed upon by Cuomo and lawmakers. Retail sales would be subject to a 9 percent tax that would go to the state and a 4 percent tax that would go to local governments. It also includes a potency tax, which is an excise tax based on the amount of THC in a product.

But the state will eventually impose other regulations on the industry, in areas of product testing, consumer safety, and the issuances of retail licenses.

As to the latter, legal experts and advocates say that if New York maintains its focus on addressing social equity, as legislators claim, the state would have low barriers of entry for obtaining licenses. That means the state would charge reasonable fees for licenses at all points of the supply and retail chain. What’s reasonable? By way of example, Massachusetts charges brick and mortar dispensaries $5,000 a year for a license, while California charges between $2,500 and $96,000 depending on a retailer’s sales volume.

The state should also create an application process that is simple and efficient, so would-be ganjapreneurs can get their businesses running promptly, and so that they don’t have to spend money on an attorney or consultant to help navigate a regulatory labyrinth, argued Fox and Klimek.

“It’s really important to be able to learn not only from your own mistakes, but learn from the mistakes of other states and localities in order to help these programs grow and evolve as necessary,” said the National Cannabis Industry Association’s Fox. He added that regulators need to be nimble so they can easily incorporate new information and research into regulations.
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If New York can get the tax and regulatory aspects of legalization right early on, then a robust cannabis industry is likely to take root in the state, he said.
An analysis of cannabis revenues from legal states shows that generally, in their first year or two, sales and revenues have been lackluster. But once the market gets humming, sales grow sharply and in most cases, revenue exceeds what the states projected at the time they legalized cannabis.

Colorado officials initially projected that the state would bring in $70 million a year in tax revenue. In the 2014 calendar year, which is when legal pot sales started in the state, Colorado netted $67.6 million in taxes. For 2020, state officials estimated cannabis tax revenues would reach nearly $388 million. More than $10 billion worth of cannabis products have been sold in Colorado since 2014.

Washington has had a similar experience. In the 2015 fiscal year, the state generated $65 million in marijuana tax revenue, a figure that has climbed steadily with each passing year. In 2020 those taxes brought in $474 million. Officials initially projected receipts of $380 million a year.

States that have legalized weed in more recent years have seen closer alignment
between projected and actual revenue.

Over on the East Coast, Massachusetts began legal sales of marijuana in late 2018. Officials projected that the state would see $216 million in the first two years, but as of February 2021 it’s pulled in $215.6 million through marijuana taxes. The Rockefeller Institute for Government’s Schultz noted that Massachusetts may have missed out on sales revenue because of a slump during the COVID-19 pandemic.

“The crux of the issue boils down to, after everything is done, after taxes are calculated, after expenses are tabulated,” Klimek said, “what is the cost to the final consumer?”

Jeremy Moule is CITY's news editor. He can be reached at jmoule@rochester-citynews.com.

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