New York’s Governor, Kathy Hochul, recently proposed a shift in the state’s cannabis potency taxation plan. She recommended substituting the potency tax in the state’s 2025 budget with a 9% wholesale excise tax, to be administered by the state’s cannabis distributors.
The substitution has several potential benefits which could positively impact the legal cannabis market, set to launch in 2024. These advantages include reductions in record-keeping costs for both businesses and the state, lowered taxes for the legal cannabis industry, a replacement of an inelastic tax that doesn’t reflect market conditions with one that does, and the avoidance of laboratory shopping.
In her budget proposal Hochul attributes the replacement of the potency tax principally with a desire to “simplify, streamline, and relieve cultivators, processors, and distributors of tax collection obligations and burdens.” Moreover, reduced governmental record-keeping is projected to save New York state $6.5 million.
The potency tax imposes notable record-keeping costs which can be onerous for smaller and comparatively underfinanced cannabis companies. A simple tax structure could lower the entry barrier for new cannabis ventures, thereby enhancing the dynamism within the legal market.
A reduction in the tax would render New York’s legal cannabis industry more competitive vis-a-vis the illegitimate market. According to a detailed analysis, undertaken by New York’s cannabis tax attorneys, the new 9% tax results in a 52% to 76% tax reduction depending on the type of product.
Another substantial benefit of an excise tax is its adaptability; it can respond to the flux of market prices. Over recent years, the price of cannabis has plummeted, necessitating a tax that fluctuates with the market as opposed to one that amplifies the tax percentage burden as prices decrease.
Despite the benefits of this proposed change, taxes continue to be a major concern for the legal cannabis industry. The 9% wholesale excise tax is undoubtedly an improvement, but it’s still higher than the fees that facilitate effective competition against illegal operations.
Moreover, New York’s cannabis industry has stalled due to multiple legal challenges to licensing introductions. Presently, only 49 legal retail shops and 200 legal cultivators are in operation, whereas thousands of illegal dispensaries and grows are running with negligible consequences. In spite of these hurdles, any decline in New York’s cannabis tax burden is welcome news for the industry.