Experts Predict New York Cannabis Taxes Will Undercut Legal Market

Prices from legal retail likely to at least double illicit market prices.

This story has been updated with a copy of the white paper on New York’s cannabis taxes, by Jason Klimek and James Mann. The paper can be viewed below.

Prices of legal recreational cannabis across New York will likely be at least twice as much as marijuana sold by unlicensed dealers and smoke shops, which will lead to a struggle for survival for much of the industry, according to a white paper authored by a pair of tax attorneys.

The paper – a draft of which was shared with Green Market Report – calculated that the average price of a legal eighth of cannabis flower in New York state with 30% THC will cost $75.53, when all taxes are factored in.

By contrast, Green Market Report last week found multiple easily accessible dealers in New York City who were already offering eighths of marijuana flower for $10-$45.

That price gap ultimately may have the opposite effect that New York regulators have been aiming for – a diverse industry composed primarily of small minority-owned companies, the paper argues.

“It just creates a scenario where small businesses, women- and minority-owned businesses, really struggle to compete,” said tax lawyer Jason Klimek, one of the two authors of the paper, who also chairs the tax committee for the New York State Bar Association’s cannabis law section.

“That’s really what it comes down to: allowing these entrepreneurs to compete against a very, very entrenched illicit market.”

Sticker Shock Coming?

Due to that enormous price difference between legal and illegal cannabis, New York is risking the failure of its social equity retailers, growers, and other business types with its current tax system, the paper asserts.

“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,” the paper reports. “Collected data suggests that consumers are willing to pay no more than a 10%-15% premium over the illicit market (or neighboring state markets) to access state-legal cannabis.”

“This will lead to a consolidation in the industry, either through acquisition or the failure of small companies to compete and outlast larger operators,” the paper reports.

“It’s going to be a disaster,” said James Mann, the paper’s other author, also a New York tax attorney who has worked with clients on both the East and West coasts.

THC Whitepaper (December 2022)

Mann said he sees New York primed to make the same mistake as California – the biggest cannabis market in the world – where the illicit marijuana market is thriving, in large part because state and local taxes drive up prices at licensed companies trying to play by the book.

In California, sticker shock was immediately apparent when recreational sales launched in January 2018. The industry clamored for years for tax reform until this June when Gov. Gavin Newsom signed a bill that did away with the state’s weight-based cannabis cultivation tax.

But even that hasn’t solved California’s issue of untaxed price competition from dealers who are technically illegal, and the state’s industry continues to struggle.

“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,” Mann said, adding that tax rates in California have led a lot of retailers to sell illegally “out the back door” in order to “keep the lights on.”

Not only that, but New York is arguably in a worse position than California, because it has legal competition right next door in Connecticut and Massachusetts, where legal cannabis is taxed at 50%-100% lower rates, according to Klimek’s and Mann’s paper.

New York’s THC percentage tax is a “relic, almost a prohibition-type mechanism” that the state should leave behind, said Manhattan-based lobbyist Kaelan Castetter, who represents marijuana companies across the supply chain.

Castetter said “every single one of my clients is worried about” what effect the tax rates will have on the industry.

“People just can’t afford to be spending that kind of money on cannabis,” Castetter said of the estimated $75 per eighth prices. “While they may want to shop in the legal market, they’re not going to be able to, because it’s going to be that or groceries.”

The Calculations

Legal cannabis prices will fluctuate depending on THC percentages found in products, because New York State’s tax rates are directly tied to THC levels, along with a 13% state retail tax. That means the $75.53 average will change depending on potency, as well as on wholesale prices, Klimek said.

Klimek used wholesale prices from Massachusetts and Illinois of about $3,651 per pound, or $8.05 per gram, which is on the higher end of the wholesale spectrum. He combined that with a theoretical example of flower that tests at 30% THC – also on the higher end of the spectrum – to get the $75.53 per eighth result.

Even if the wholesale prices drop to about $1,000 per pound, that would still come out to about $60 for an eighth of flower under the state’s current tax system, Klimek said, still far higher than illicit marijuana prices. Plus, he only factored in a 100% markup rate by retailers, while markup rates often get as high as 300%, he said.

That means the tax rates are dangerously high for the industry to be sustainable in the long-term, Klimek said.

Klimek admitted that his findings probably won’t track with prices immediately for adult-use sales, because his figures are based on prices of indoor-grown flower, not outdoor, which will be what comprises the available inventory in New York for the foreseeable future. And THC levels have yet to be formally reported anywhere for crops that will be sold during the New York recreational market rollout.

But the taxing system’s faults are still going to present a major hurdle, Klimek predicted, just by turning off huge swaths of customers.

“I think we’re going to see what happened in Massachusetts,” Klimek said. “People were interviewed coming out of dispensaries on the first legal day, and the sum of it was, ‘Yeah, it was a great experience, but I just paid twice what I normally pay, so I don’t know that I’ll be back.’”

Reform Possible?

Castetter, the cannabis lobbyist, said he’s “optimistic” that state lawmakers in Albany next year, along with the administration of Gov. Kathy Hochul, will decide to restructure the cannabis tax system.

“The Hochul administration … they got stuck with some pretty bad policy, but they have a chance, before this really gets going, to roll it back and to change it,” Castetter said, noting that the tax system dates back to the Andrew Cuomo administration, Hochul’s disgraced predecessor.

The Cannabis Association of New York also lists tax reform as its “top priority” in 2023, said the organization’s executive director, Dan Livingston.

“I’d say they’re more receptive now than they were last session,” Livingston said of state lawmakers on the topic of marijuana taxes.

The key to persuading lawmakers, Castetter said, is showing that a tax policy shift can be accomplished without sacrificing state tax revenues.

That’s a point that Klimek and Mann covered in their paper by showing that in multiple states, tax revenues shot up when cannabis prices were lowered.

“For every 1% reduction in price, there is a corresponding 2% increase in sales,” the paper reported, citing data from Whitney Economics.

“If we can lower that tax rate to allow our companies to compete with the illicit market, we’re going to see that tax revenue increase over time, because you’ll be able to pull more people from the illicit market,” Klimek argued.

“That seems to be the case in every other state. You’re not really creating new cannabis consumers. You’re transitioning them from the illicit market to the legal market, and the only way to do that is to compete on price.”

Debra Borchardt contributed to this report.

John Schroyer


3 comments

  • michael g mclaughlin

    December 12, 2022 at 9:06 pm

    Did we really need any more evidence that the illegal weed costs will be half due to taxes, regulations and fees? No intelligent person would think otherwise.

    Reply

  • Greg Browman

    December 13, 2022 at 10:21 am

    As a small scale cannabis manufacturer in California it has become clear to me that if the government wanted to help the industry they easily could and won’t until it benefits those who have the most influence on that government. What better way for those influencers to enter the market than to first decimate the creatives who built it using clever influence on the regs to make it near impossible to survive. There was so much joy and creative inspiration back in the day, engaging with peers full of vision or seeing it in the new products being created but now, well, the bloom is off the rose and so many are gone. But the dream is still alive, but older and wiser I hope, and I deeply honor the resilient creatives who brought the best of themselves to create our marketplaces.

    Reply

  • Galina German

    December 14, 2022 at 12:27 am

    John, I really enjoyed the information you have shared in your article. As one of the CAURD recipients, we are very worried about the prices and whether we would be able to compete, not only with the with unlicensed sellers but with our neighbors in Mass, NJ and Vermont. After speaking with many growers and distributors it does seem that our dispensary would have to sell an 1/8 at at least $60-$80, which will be unaffordable for our NY Capital Region retail market. We are worried that we are doomed to fail.

    Reply

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