New York Gov. Kathy Hochul on Tuesday proposed the state repeal its THC potency-based tax structure for legal cannabis – a move industry stakeholders have long said will simplify tax collection and burdens on small marijuana businesses.
In a 144-page executive state budget proposal for the 2025 fiscal year – which begins April 1 – Hochul’s office proposes the state “repeal and replace the cannabis potency tax,” saying the change would promote and support the expansion of the Empire State’s legal adult-use market.
“This is tremendous news for the New York cannabis cultivator, who is desperate for relief,” said Joe Rossi, leader of the Cannabis Practice Group at Park Strategies who has lobbied policymakers to drop the potency tax for years. “The governor has heard them and I applaud her for that.”
When state legislators legalized adult-use cannabis by passing the MRTA in March of 2021, the law included a tax structure that charges based on THC potency.
Under current rules, distributors must pay half a cent per milligram of the amount of total THC for flower; eight-tenths of one cent per milligram for concentrates and three cents per milligram for edibles. That’s in addition to a 9% sales tax and municipal taxes of 4% of retail sales.
If legislators pass Hochul’s proposed budget, distributors would instead pay a 9% excise tax, while retailers would continue paying sales and municipal taxes. For vertically integrated companies – which include medical cannabis Registered Organizations, and licensed microbusinesses – the new wholesale excise tax will accrue on the final retail sale to consumers, and be imposed on 75% of the final retail sales price.
Moving from a potency-based tax structure to an excise tax will likely make tax collection much simpler for government officials and businesses, said Patrick Oglesby, founder of the tax policy nonprofit Center for New Revenue. It will likely reduce tax bills on businesses and consumers, which would help legal businesses compete with illicit shops, which don’t pay cannabis taxes.
“In many jurisdictions like New York the illicit market is thriving, and part of the blame is often placed on taxes – you can’t put all the blame on taxes, but yes, it’s a factor,” Oglesby said. “It’s not surprising to see taxes going down.”
Oglesby added that state officials may want to consider market dynamics and tax revenue goals if they’re going to approve Hochul’s proposal. That’s because prices in legal markets tend to start off high, but go down over time, Oglesby said. Taxing based on sales prices, therefore, could mean the state receives less cannabis tax revenue over time.
If New York drops its potency tax, the move could have a far-reaching effect on the U.S. legal cannabis industry, Oglesby said. New York and neighboring Connecticut were among the only fully legal cannabis states that taxed based on potency. If New York shifts to an excise tax, other states may take that as a signal that potency-based taxes aren’t worth trying.
“It’s going to be interesting to look at the reasons for this and analyze what New York is doing, and why,” said Oglesby, who notes that he’s currently involved with a State of California study of cannabis potency taxes. “Is this an indication that a potency tax is not the way to go?”
The Cannabis Association of New York, the state’s largest cannabis industry lobby, welcomed Hochul’s repeal-and-replace proposal. CANY has long called for state officials to change course on New York’s potency tax and impose an excise tax instead.
CANY President Damien Cornwell told NY Cannabis Insider that Hochul’s proposal proves that the arguments potency tax opponents have been making for years are correct. According to CANY’s calculations, the system Hochul proposed would result in a tax rate of about 30% for cannabis businesses.
“Of course we will continue to advocate for a lower tax rate, however we believe that is a good start to a final solution,” Cornwell said. “It is a validation that the governor and Department of Budget tacitly agree with our general concept of restructuring the potency tax.”