New York Set to Hobble 'Legal' Cannabis with Taxes and Regulations

Empire State politicians will soon wonder why the marijuana black market still thrives.

Politicians who fail to learn from their stupid decisions are doomed to repeat them, and prohibitionist policies seem to offer the toughest lessons of all. Time and again, government officials impose bans on things they don't like only to drive the public to illegal sellers. Politicians then grudgingly "legalize" the market but burden it with taxes and red tape that keep the black market thriving. New York seems ready to recreate all of the mistakes of the past with a "legal" recreational market so hobbled that it will offer uncompetitive prices to consumers and daunting barriers to vendors.

"Since June 1, the New York's Cannabis Control Board has issued 162 recreational cultivation licenses," Bloomberg Tax recently noted. "Those fortunate enough to obtain one of New York's recreational cannabis licenses will be forced to contend with a gauntlet of state and local taxes."

The analysis, prepared by three accountants, detailed a long list of sales taxes, corporate taxes, and "recently enacted adult-use cannabis taxes." Given the number of jurisdictions involved and uncertainty as to how they'll apply to businesses that won't be able to open their doors until the end of the year, at soonest, the authors declined to guess at the final tax burden. But it will be high, and compliance a guessing game with penalties awaiting those who cross the authorities. It's a good bet that many entrepreneurs accustomed to operating in the illicit market will remain underground rather than risk the costs and hassles of legal operation as envisioned by Empire State officials. After all, technical legalization hobbled by stiff taxes and regulation has already stumbled elsewhere.

"The state has taxed marijuana three separate times as it travels from farm to consumer. Many counties and cities impose their own taxes, at varying levels, on top of the state levies," The Washington Post reported this month of California's byzantine system which favors large corporate operations with the ability to navigate the rules. "California's cannabis taxes come on top of licensing fees and regulatory permits, which can cost tens of thousands of dollars annually for growers, burying those who used to work without regulation in red tape and state invoices."

That explicit prohibition is only one legal barrier driving buyers and sellers to black markets seems to be a revelation to regulators of newly sort-of-legal cannabis markets. The fact that taxes and regulations do the same had to be rediscovered in recent years by officials in California, Colorado, Oregon, and Washington, among other places. Precisely that point was made to New York officials in a 2018 impact assessment featured to this day on the website of the state's Office of Cannabis Management.

"The higher the tax rate imposed, the higher the legal market price will be," the document cautions. "In turn, a higher legal market price will have a greater price effect, which will result in users less likely to exit the unregulated market."

"Washington State initially had higher tax rates and restructured their taxation after the realization that the taxes were cost prohibitive. Colorado, Washington, and Oregon have all taken steps to reduce their marijuana tax rates," the report adds.

Intrusive and restrictive rules also matter, the 2018 New York assessment notes, as it warned against measures such as "allowing localities to ban the sale of marijuana, which will all lead to an increase of marijuana purchased on the unregulated market and will reduce the amount of tax collected." Nevertheless, regulators are busy binding the still-aborning legal marijuana trade in red tape. In the pursuit of social justice, those include preferences for those hurt in the past by prohibitionist laws.

"New York is the first to offer its initial dispensary licenses solely to entrepreneurs with marijuana convictions," according to Politico. "It's a move aimed at offering an advantage to people, disproportionately in Black and brown communities, harmed by the war on drugs."

That's a nice sentiment, but it tries to mold a market into a politically favored form rather than a natural expression of free human interactions. California offers a case study in how trying to create the market politicians want makes it accessible only to those with connections and compliance departments.

"The once-mystical heart of the nation's marijuana industry is dying, fast, strangled not by law enforcement but by the high taxes and baffling regulation that have crushed small farmers since state voters approved legalization almost six years ago," the Washington Post story mourned. "The state rules and omissions have also empowered a still-thriving black market for marijuana—once a chief target of state regulators—whose growers sell their product illegally across state borders and still fetch a lucrative price."

New York's recreational marijuana regulators are about to walk well-trodden ground paved with government forms. Their motivation is apparent from the fact that so many of those forms involve tax collection and extensions of control. Officials mouth sentiments about removing the legal burdens on those with criminal convictions for dealing in cannabis, but they're obsessed with shaping the market to meet their peculiar vision and with the money they hope to make. The 2018 impact assessment includes colorful charts predicting first-year tax revenues ranging from $248.1 million to $677.7 million depending on how people respond to that "gauntlet of state and local taxes."

And even before social justice became a priority for regulators, the 2018 impact assessment offered plentiful assurances of the alleged benefits to be had from rules regarding age limits, "adequate security at cultivation and dispensing facilities," hours of operation, tracking and reporting requirements, THC content, and more. But all such barriers will spur people already complaining about existing medical marijuana rules to stick with the illegal market.

"Operators and patients have long complained of draconian regulations and taxes, which have made medical marijuana less accessible and more expensive than illicit market offerings," The New York Times reported last week about the perils facing the new recreational market. As a result, "the illicit market is thriving in New York, some of it in plain sight."

That's not to say it's all bad news. A legal market with high taxes and overly stringent regulations is still a market in which people aren't arrested and jailed. Rules can be loosened to what people will tolerate, as they have been elsewhere. But New York officials have yet to learn that markets function based on the choices of participants. The wishes of government regulators who want to use them as social-engineering tools and ATMs don't really matter. Marijuana markets will thrive so long as there are customers to be served. The question is whether they will thrive in the open under light taxes and regulations, or underground to escape the heavy hands of politicians.