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ALBANY — Gov. Kathy Hochul’s executive budget released Tuesday proposes repealing a state “potency tax” on marijuana products that industry stakeholders said has deterred legal retail sales and driven more consumers to buy cannabis from unlicensed vendors.
Hochul’s proposal, which follows efforts in the Legislature to repeal the potency tax, would replace it with a wholesale excise tax of 9 percent, which would be charged to consumers in addition to the state and local retail excise taxes of 9 and 4 percent, respectively.
State Sen. Jeremy Cooney, a Rochester Democrat, sponsored legislation last year that would have repealed the potency tax with a flat-rate excise tax, which he noted would be similar to how alcohol products that vary in potency are taxed.
Cooney has warned that a flourishing illicit market for cannabis would be “a public safety and public health disaster.” Unregulated products stand a greater chance of being contaminated with unknown additives, Cooney said, a direct refutation of what the legalization law set out to accomplish.
But Cooney’s proposal called for the potency tax to be replaced by a 7 percent excise tax that would be phased in over a course of years, which he said would help keep prices down for retail vendors and suppliers who are battling to get customers to stop buying unregulated products.
“I think the timeline and the amount matters in the context of getting our legal retail marketplace up and running and competitive with the existing illicit market footprint,” Cooney said. “A phased-in approach works best in terms of maximizing competitiveness. … I think we also need to look at other states like Colorado, that have actually had a lower tax rate than New York but have realized higher revenues. … If we’re able to really increase the volume of sales, overall, even though it’s a lower tax rate, it’s better than losing it to the illicit market where we get nothing.”
The potency tax also has been criticized for its complexity, which has been heaped on the new retail marijuana industry stakeholders who have already been grappling with supply-chain issues and a slow rollout that has financially imperiled many of those who have tried to succeed in the struggling market.
In December 2022, Jason W. Klimek, a Rochester attorney who specializes in tax and cannabis laws and regulations, co-authored an analysis with James B. Mann in which they noted that states with “lower overall rates and simpler tax structures facilitate higher tax revenues and create an environment in which smaller businesses can thrive.”
They also noted, as have others, that higher prices for higher-potency marijuana would drive patrons to purchase unlicensed products.
“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,” they wrote. “We advocate a single tax at the final point of cannabis sale as it is easier to administer and less burdensome for cannabis operators.”
Allan Gandelman, president of the Cannabis Association of New York, applauded Hochul for listening to their concerns. He said industry stakeholders met with her administration last month and proposed repealing the potency tax and replacing it with a flat tax, although they had suggested that be just 3 percent.
“It’s definitely a big win to revise that potency tax and make it a flat tax,” Gandelman said. “I have to run the numbers and see what that (9 percent excise tax) looks like, but honestly, right now, anything is better than the potency tax because that thing was completely untenable.”
Gandelman noted that the potency tax has been “almost impossible” to adminster because it’s so complicated “and every single product has its own tax level and… it was not a sustainable tax that could be audited.”
In 2022, more than 200 licensed cultivators grew cannabis in New York, and about 80 of those farms produced “significant” amounts of marijuana — roughly 300,000 pounds. But many of those crops ended up sitting in bags rotting as the state pursued short-term fixes that included allowing “showcase events” at festivals and other venues where retailers and farmers could sell products.
The relatively small number of retail operations that opened in the first two years after marijuana was legalized have been competing with an illicit marketplace that has seen thousands of underground merchants selling marijuana with often very few legal repercussions, especially in New York City.
Hochul’s executive budget also includes $68 billion for the state Office of Cannabis Management, which said its enforcement efforts with state tax department investigators and other agencies have resulted in more than $56 million of illicit products seized — roughly 11,600 pounds.
The governor’s budget also includes legislation that she said would strengthen state Cannabis Law “to better enable the Office of Cannabis Management… as well as local government agencies, to seal or padlock an unlicensed cannabis business.” It also provides funding to bolster staff resources in the state Department of Taxation and Finance to assist in enforcement efforts.
