The Dollars and Sense of Legalizing Adult-Use Pot
Within the next few weeks, New York may well join the 15 other states that have, so far, legalized the sale of recreational marijuana for adult use. That’s not saying, however, that legalization will be simple or easy; far from it.
Making recreational pot legal (New York already permits medical marijuana use) entails a far-reaching set of decisions touching on public health, social equity, economic and employment opportunities, and criminal justice reform, as well as how to tax and regulate production and sale of a newly legal drug and shape the development of a new industry.
Our training and backgrounds are in economics, so we both understandably come at this issue from that perspective. In our opinion, legalization has the potential to strengthen local economies and redress existing economic and social inequities in both urban and rural New York.
Done right, legalization can open up opportunities for small retailers, especially in largely Black and Brown urban neighborhoods – communities not only reeling from restaurant and other small business closures caused by the coronavirus pandemic, but also scarred by the disproportionately negative impacts of aggressive marijuana-related policing and punishment during a decades-long war on drugs.
State licensing policy and the State’s ability to make capital more easily available can enable such small businesses to more readily get in on what we estimate will be over a half-billion dollars in adult-use sales in the first full year after legalization – a market that will grow rapidly in the years after that. State policy can also help out economically struggling rural areas by taking steps to encourage small-scale marijuana cultivators and keep cannabis dollars re-circulating in Upstate communities.
Legalization measures proposed by both Governor Andrew Cuomo and the State Legislature converge in some respects and diverge on others. At this writing there remain some degrees of separation on issues including: how to deal with past convictions for low-level pot offenses; how (and how heavily) to tax legal sales; and what precisely to do with these new tax revenues.
We think that sound economic research should help guide such political and policy decisions – which is why we have recently taken a fresh and thorough look at the economic and revenue impacts of marijuana legalization in New York State. Here is what we found.
First, we estimated the potential tax revenue and economic impact of legalizing adult-use marijuana over the next several years. We estimate total market demand at about $3.7 billion in the current fiscal year (2021), with demand in nominal dollars rising to $3.9 billion by FY 2027. However, because legal sales would grow over time and gain market share at the expense of illicit sales, legal market sales would rise from $566 million in the first full fiscal year of implementation (FY 2023) to $2.6 billion four years later (FY 2027).
Using these estimates and the Governor’s proposed tax structure, we estimate that State recreational marijuana excise tax revenue (which would be similar in nature to State taxes on, for example, tobacco sales) would be $159 million in FY 2023, rising to $765 million in FY 2027. We estimated that the State tax yield from the legislature’s proposal would be $102 million in FY 2023 and $469 million in FY 2027. The Governor’s proposal to apply the sales tax to adult use cannabis sales would generate $25 million in local sales taxes in FY 2023, rising to $114 million in FY 2027.
Marijuana taxes need to cover the regulatory costs as well as fund essential social equity investments. In the process, the State also needs to balance its revenue needs with the priority of drawing consumers away from the illicit market and limiting the leakage of legal sales to neighboring states.
Employing a widely used regional input-output model that we customized to reflect 100 percent in-state cultivation and processing of all marijuana flower and marijuana-infused edibles and oils, we also estimated that the $2.6 billion in retail sales projected for FY 2027 would generate 50,806 jobs, $2.2 billion in employee compensation, $4.7 billion in value added, and $6.1 billion in total economic output. The economic activity associated with the cultivation and sale of recreational marijuana would generate additional State and local tax revenue above and beyond the excise and sales taxes related to marijuana sales.
Finally, we found that the employment, income, and State and local tax impact of legalizing adult use cannabis will be greater to the extent that New York’s leaders make policy choices that encourage locally owned cannabis cultivators, processors, distributors, and dispensaries, and, as with medical marijuana, opt for a “labor peace” provision that makes it more likely workers throughout the cannabis supply chain will enjoy fair pay, benefits, and labor protections.