Potency tax repeal, more enforcement muscle
Lawmakers discussing ways to incentivize local authorities to go after illicit pot shops
ALBANY — A controversial “potency tax” on marijuana products is on track to be repealed in the state budget as Gov. Kathy Hochul and state legislators are negotiating how to replace it with a flat excise tax.
Lawmakers are also discussing how to expand or enact new statutes that would give law enforcement agencies more clear authority to raid illicit cannabis shops, seize their products and shut them down.
Police agencies may already have that authority, but many law enforcement leaders, including prosecutors, have been reluctant to devote resources to an effort that could be viewed as reopening the war on drugs — essentially targeting businesses, sometimes owned by minorities — that are competing with the legal retail market.
But the legislation being discussed would incentivize enforcement by allowing local municipalities to move to keep money they seize from underground shops operating without a license. Gov. Kathy Hochul’s executive budget, released in January, includes a proposal to expand the powers of the Office of Cannabis Management to make it easier to padlock illicit shops. Her plan would also authorize local governments to padlock unlicensed dispensaries and establishing local registries of licensed cannabis businesses.
In January, cannabis investigators and the Department of Taxation and Finance inspected 60 shops, including 20 that were revisited and suspected of selling unlicensed cannabis. Those inspections led to the seizure of hundreds of pounds of cannabis flower, edibles and concentrates estimated to be worth nearly $3.4 million. As of that month, 470 illicit shops had been inspected and more than 13,000 pounds of cannabis products worth more than $63 million seized.
Still, the Office of Cannabis Management has struggled to fill dozens of investigative positions as it has teamed with police agencies and the state Department of Taxation and Finance in conducting raids of unlicensed shops across the state. But cannabis industry stakeholders and many lawmakers say those efforts are not having enough impact in slowing the illicit sales that are taking business from the more than 60 licensed retail shops.
“One of the challenges… is the number of enforcement officers currently employed by the Office of Cannabis Management,” said state Sen. Jeremy A. Cooney, a Rochester Democrat who chairs the Senate’s Cannabis Committee. “They haven’t relinquished, nor did they want to relinquish, sole control over state enforcement of illicit cannabis. But their their ability to move expeditiously and respond to local mayors and supervisors is very limited.”
Cooney added that under the proposal, “We’re giving them the stick and we’re giving them the carrot by allowing them to keep the revenue. And that didn’t that didn’t exist before.”
Sources in the Senate and Assembly said their “one-house” budgets, due next week, both have policy language to repeal the potency tax, which industry stakeholders have said is also damaging legal retail sales and has driven more consumers to buy cannabis from unlicensed vendors who are not collecting or paying taxes.
There are also discussions in the Legislature to provide more financial aid to cannabis farmers who were stuck with hundreds of tons of unsold product over the past two years due to the state’s delayed rollout of the retail marijuana industry.
State Sen. Michelle Hinchey, a Hud
son Valley Democrat who chairs the Senate Agriculture Committee and is a member of the Cannabis Committee, said that many cannabis farmers, “through no fault of their own, are facing financial ruin because of the delayed rollout of legal dispensaries, and I’m pushing for relief in the budget to help our growers stay in business.”
In 2022, more than 200 licensed cultivators grew cannabis in New York, and about 80 of those farms produced “significant” amounts of marijuana — roughly 300,000 pounds. But many of those crops ended up sitting in bags rotting as the state pursued short-term fixes that included allowing “showcase events” at festivals and other venues where retailers and farmers could sell products.
“There is no New York cannabis market without New York growers, and we’ll be doing everything we can to support our farmers so we can have a locally grown cannabis industry,” Hinchey added.
Hochul has proposed replacing the potency tax with a wholesale excise tax of 9 percent, which would be charged to consumers in addition to the state and local retail excise taxes of 9 and 4 percent, respectively.
The Senate’s one-house budget adopts the language in a bill sponsored by Cooney that would also repeal the potency tax with a flat-rate 7 percent excise tax, which he noted would be similar to how alcohol products that vary in potency are taxed.
Cooney has warned that a flourishing illicit market for cannabis would be “a public safety and public health disaster.” Unregulated products stand a greater chance of being contaminated with unknown additives, Cooney said, a direct refutation of what the legalization law set out to accomplish.
The potency tax has been criticized for its complexity, which has been heaped on the new retail marijuana industry stakeholders who have already been grappling with supply-chain issues and a slow rollout that has financially imperiled many of those who have tried to succeed in the struggling market.
Jason W. Klimek, a Rochester attorney who specializes in tax and cannabis laws and regulations, co-authored an analysis with James B. Mann two years ago in which they noted that states with “lower overall rates and simpler tax structures facilitate higher tax revenues and create an environment in which smaller businesses can thrive.”
They also noted, as have others, that higher prices for higher-potency marijuana would drive patrons to purchase unlicensed products.
“The THC tax, untried by any other state, is excessively complex, costly to cannabis enterprises and costly to collect, and will lead to shopping for the best lab results,” they wrote. “We advocate a single tax at the final point of cannabis sale as it is easier to administer and less burdensome for cannabis operators.”