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As New York Launches Cannabis Sales, Tax Burden Poses Challenges

January 3, 2023

New York launched its state recreational cannabis market on Thursday when sales began in New York City. The first shop to open, in lower Manhattan, is run by Housing Works, a non-profit focused on homelessness and AIDS that operates thrift shops as well. The first purchase was made by Chris Alexander, the executive director of the state’s Office of Cannabis Management. “It is a privilege and an honor to be here today, as we said we would earlier this year, to make history with the first ever legal retail sale of cannabis in New York State,” he said. “This is a significant part of the battle to end cannabis prohibition that we can say has finally been won.”

However, headwinds are already blowing. Factoring in the various taxes on cannabis sales along with supply and the price of illicit cannabis, consumers should expect the price of an eighth of an ounce of cannabis (3.5 grams) purchased in legal channels to be nearly twice what it would be in the illicit market. That estimate comes from a white paper by New York tax attorneys Jason Klimek and James Mann, who calculated that 3.5 grams of cannabis flower will cost $75 on average from retail locations. For comparison, $40 or less is the standard street price for an eighth.

“Consumers are very price sensitive in the cannabis space and will abandon the legal market in favor of the illicit market (or neighboring state markets) if the legal market cannot compete on price,” the paper reports. “Collected data suggests that consumers are willing to pay no more than a 10%-15% premium over the illicit market (or neighboring state markets) to access state-legal cannabis. This will lead to a consolidation in the industry, either through acquisition or the failure of small companies to compete and outlast larger operators.”

Klimek and Mann hope their work can help convince lawmakers to back off the tax rates and look to the long term. “For every 1% reduction in price, there is a corresponding 2% increase in sales,” the paper said, citing data from Whitney Economics. “If we can lower that tax rate to allow our companies to compete with the illicit market, we’re going to see that tax revenue increase over time, because you’ll be able to pull more people from the illicit market,” Klimek said.—Danny Sullivan

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