Cuomo proposes New York marijuana tax

In his fiscal 2022 budget proposal unveiled this week, New York Governor Andrew Cuomo includes an excise tax on what could be legalized recreational marijuana. New York plans to join neighboring New Jersey, where voters approved an election campaign to legalize recreational marijuana last November. Governor Cuomo expects tax revenue to eventually soar to more than $ 300 million a year.

The excise tax has two components: a wholesale tax based on tetrahydrocannabinol (THC is the main psychoactive chemical in the marijuana plant) and an ad valorem tax based on the retail price. If the governor’s proposal goes into effect, smokable parts of the marijuana plant (flower and shake) would be taxed at 0.7 cents per milligram of THC. Concentrates and oils with 1 cent per milligram of THC; and infused edible products at 4 cents per milligram. The argument in favor of the differentiated rates is that the absorption of THC varies according to consumption. The second level of taxation would take place if all products were taxed at 10.25 percent of the retail price. In addition, general state and local sales taxes (which averages 8.52 percent together) would apply to all sales.

Together, these taxes make a relatively high effective tax rate: a 20 percent THC ounce of marijuana flower (roughly 5.6 grams of THC) would be taxed wholesale at $ 39, and a 100 milligram THC edible would be wholesale Taxed at 4 USD. Additionally, both products would be charged the additional 10.25 percent ad valorem tax as well as the general sales tax that will be charged on the final retail sale. While the ad valorem tax can impose a considerable tax burden on consumers at an early stage, this burden will decrease with falling prices at high prices due to the low initial supply.

Taxing THC by weight would be unique in the U.S. unlike any other state with legalized recreational marijuana. Illinois comes closest as the Ad Valorem tax rate increase is based on the effectiveness of the product. Potency-based taxes are not a novel idea, however. In 2019 the Legislative Analyst’s Office (LAO) in California published a report recommending moving existing taxes to a potency-based system. The LAO recommended a rate between $ 0.006 and $ 0.009 per milligram of THC. In Canada, oil, edible products, extracts and topical products are taxed at 1 cent (CAD) per milligram of THC.

If enacted, New York would provide a set of unique dates that broaden our understanding of how best to tax recreational marijuana.

The imposition of excise and general sales taxes on recreational marijuana is legitimate because, due to certain characteristics (often negative externalities), excise taxes are targeted to specific transactions and general sales taxes should capture most consumer transactions. To this end, it is appropriate to use THC as a proxy for the negative externalities associated with marijuana use. In fact, THC is possibly the fairest tax base, as more effective products are more expensive under a THC-based tax system, reflecting the additional societal costs associated with higher THC consumption. With the direct taxation of THC, products with a similar damage profile are taxed at similar rates. This is a common practice in tax policy as potency is an established tax base agent in the United States. For example, alcohol products are taxed in categories based on their effectiveness.

At this point in time, the main problem with introducing a potency tax is reliable testing, especially for vegetable raw material (this is much easier for infused products). The marijuana industry is still a fledgling industry and currently test results depend on which laboratory tests the product is tested in. Although some test standards have been developed for laboratories, it is of the utmost importance that companies and tax collectors can trust the test results if they are to determine tax liability. Furthermore, we still don’t know much about the interactions between cannabinoids and their effects on potency. Legislators should remain open to adjusting the mechanisms for determining potency as we learn more on the subject.

In addition to being the fairest option, potency-based taxes have the added benefit of encouraging the consumption of less potent products over high potency products, although the tax should not be so high that consumers are encouraged to return to the black market.

Ideally, New York would impose an excise duty with no ad valorem component, since price has no consistent relationship to damage. For example, an edible THC candy bar with 100 milligrams of THC doesn’t get more or less harmful due to the quality (and price) of the chocolate.

Another positive element of the proposal is an understanding that creating a legal market for recreational marijuana takes time. The sales projections in the plan are relatively conservative and aim to raise around $ 350 million over time. Our estimates assume that New York can raise around $ 180 million in the first full year after implementation, which would grow to over $ 400 million after three to four years. Under the governor’s plan, $ 10 million of excise tax revenue would be used for social justice purposes in the first year, growing by $ 10 million annually and eventually reaching $ 50 million in year five. The rest will be dedicated to the Cannabis Revenue Fund.

While general income from funds shouldn’t be the top priority in legalizing recreational marijuana, states that do choose to legalize it will have income available – just not in the short term. In addition to general sales tax, legal marijuana companies would also pay corporate taxes and employees would pay personal income taxes. The revenue from these broad-based taxes, combined with potential savings as illegal operations decrease, constitute the fund’s general revenue.

New York lawmakers have their own legalization plans. Senate Bill 854 would introduce a recreational marijuana tax consisting of an 18 percent excise tax, a 1 percent tax for counties or cities with a population of one million or more, and a 3 percent tax for communities while the Products are excluded from the general VAT. Before New Yorkers have a chance to buy marijuana for recreational use, lawmakers and the governor must reach an agreement.

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