Governor Kathy Hochul's executive budget, released on Tuesday January 16th, has proposed a significant change in the taxation structure for cannabis products in New York. The proposal seeks to repeal the existing state "potency tax," which has faced criticism for deterring legal retail sales and driving consumers towards unlicensed vendors. Instead, the governor suggests implementing a wholesale excise tax of 9 percent, aiming to address concerns raised by industry stakeholders.

New York State’s Current Cannabis Potency Tax

The potency tax, criticized for its complexity and operational challenges, is set to be replaced by a flat-rate wholesale excise tax. This move is seen as a response to the difficulties faced by the adult-use retail industry in New York, which has been grappling with supply-chain issues and a slow market rollout. Stakeholders argue that the existing tax structure is not only burdensome for cannabis enterprises, but also hampers their ability to compete with the flourishing illicit market.

New York Senator Jeremy Cooney Cites Potency Tax Reform Amid Industry Concerns

State Senator Jeremy Cooney (D-Rochester), Chair of the Senate Subcommittee on Cannabis, sponsored legislation in the previous year aimed at repealing the potency tax. Cooney has emphasized the need for a phased-in approach, suggesting that it would help maintain competitive prices for legal vendors while discouraging consumers from turning to unregulated products. The concerns raised include potential public safety and health risks associated with unregulated cannabis, which may be contaminated with unknown additives.

To head off what he called “a public safety and public health disaster” of New York’s proliferating unlicensed businesses, the Senator had proposed a 7 percent excise tax. He explained, “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… 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 Times-Union noted that cannabis industry stakeholders have criticized the potency tax for its complexity as well as being exorbitant; it has posed yet another financial hurdle for adult-use retail operators in a sector besieged by supply-chain issues and a slow rollout. A market analysis written in December 2022 by attorney Jason W. Klimek and James B. Mann examined states with different cannabis tax structures, ultimately concluding that a THC potency tax was “excessively complex” and that New York would benefit most from “a single tax at the final point of cannabis sale as it is easier to administer and less burdensome for cannabis operators.”

Cannabis Industry Stakeholders’ Reactions And Proposed Changes

Allan Gandelman, president of the Cannabis Association of New York (CANY), applauded Governor Hochul for considering the concerns of industry stakeholders in her plans to revise the tax. Gandelman stated that the governor’s administration had met with several cannabis operators in the past month regarding potential changes to the tax - although the cannabis advocates had recommended a 3 percent flat tax, which does not seem likely to be considered any time soon. 

“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.”

He added that the practical challenges associated with administering the potency tax, including auditing and individualized tax levels for each product, have been “almost impossible” major hurdles for licensed cultivators and retailers. 

Enforcement And Strengthening New York’s Cannabis Law

Governor Hochul's executive budget not only addresses taxation concerns, but also allocates $68 billion for the state’s Office of Cannabis Management. The budget includes provisions to strengthen New York’s Cannabis Law (the Marijuana Regulation and Tax Act), enabling better enforcement capabilities. Efforts to combat the illicit market involve collaboration with the state Department of Taxation and Finance investigators and other agencies, resulting in the seizure of over $56 million worth of illicit cannabis products.

The proposed overhaul of New York's cannabis taxation system reflects the governor’s promised commitment to promoting a legal and regulated market. As stakeholders eagerly await further details and analysis of the proposed changes, the potential impact on the industry's competitiveness, consumer behavior, and overall market dynamics remains a focal point of discussion. We may not see the final words on the matter for quite some time. 

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Jeremy Cooney

Office of Cannabis Management

Cannabis Association of New York

Allan Gandelman


Featured image: New York Governor Kathy Hochul presents the 2024 Executive Budget. Screengrab via WNYT News Channel 13.