This article was the discussion topic of No. 23 of the Cannabis Commerce + Chemistry Podcast. Listen now.
A report released on December 12, 2022 entitled "New York's THC-Potency Excise Tax Analysis and Recommendations" that was authored by tax attorneys Jason Klimek from Barclay Damon LLP and James Mann from Lucosky Brookman LLP examined "the current tax structure in the New York State cannabis law and its impact on the burgeoning cannabis industry in the state."
The analysis concluded that the "out the door" cost of a one-eighth ounce loose-leaf cannabis product with 30 percent THC in New York will be $75.53, far above the price fetched by unlicensed underground ("legacy") vendors.
Green Market Report, a cannabis business media organization in New York, found "multiple easily accessible dealers" offering one-eighth ounce of marijuana for $10-45—significantly undercutting the rates of the predicted prices of the state's newly licensed cannabis sellers.
Consumers are Price Sensitive
This real-world price differential, say the authors of this report, may be the undoing of the emerging New York market for legal adult-use cannabis and cannabis products. "Consumers are very price sensitive in the cannabis space and will abandon the legal market in favor of the illicit market (or neighboring state markets) if the legal market cannot compete on price," noted the report.
"New York cannabis consumers would pay $12-52 for an eighth of marijuana, a far cry from the $75 predicted by this report."
No More Than 10-15 Percent
"Collected data suggests that consumers are willing to pay no more than a 10-15 percent premium over the illicit market (or neighboring state markets) to access state-legal cannabis," reported the paper. Thus, according to the street prices cited above, New York cannabis consumers would be willing to pay for an eighth of loose-leaf marijuana flower from $11.50 (supposedly for low quality) to about $52 (supposedly for premium quality with approximately 30 percent THC). This range is a far cry from the $75 legal market cost predicted by this report.
New York Worse than California
Co-author and tax attorney James Mann, who has worked with clients on both the East Coast and the West Coast, told Green Market Report that New York's new law is "going to be a disaster."
"I see New York state basically seeking to replicate the entire set of conditions that have made the California market untenable for honest cannabis businesspeople," said Mann. He said that New York is arguably in a poorer position than California due to close competition from Connecticut and Massachusetts—both of which feature adult-use cannabis taxes that are, according to this report, 50-100 percent lower.
Report Conclusions
The Executive Summary of the report made the following conclusions:
"The THC tax, untried by any other state, is excessively complex, costly to cannabis enterprises and costly to collect, and will lead to shopping for the best lab results.
"These essential attributes of the THC tax result in burdens that fall disproportionately on small business and social equity applicants, burdens that can more easily be borne by large cannabis businesses.
"The amount of the THC tax does not vary with changing market conditions and therefore exacerbates the boom-and-bust cycle that has been experienced by other states with fixed tax burdens.
"The large amount of data now available from other cannabis-legal states strongly suggests that lower overall rates and simpler tax structures facilitate higher tax revenues and create an environment in which smaller businesses can thrive.
"A large amount of data strongly suggests that lower tax rates and simpler tax structures facilitate higher tax revenues."
"Proponents of the current tax regime point to all the good things they can do with the tax revenue, but that is irrelevant to the structure of the tax. Further, if the tax burden is too high, as it seems to be, that will only result in lesser tax revenues and greater illicit market activity.
"New York State already has a massive and well-established illicit market that has flourished after cannabis was 'legalized' under MRTA, and the THC tax and total tax burden will make this problem far worse.
"We advise a single tax at the final point of cannabis sale as it is easier to administer and less burdensome for cannabis operators."
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