Why New York’s plan to legalize cannabis for adult recreational use is a big deal

New York Gov. Andrew Cuomo’s plan to legalize cannabis for adult recreational use in the Empire State is a milestone in the push toward full legalization of the substance in the U.S., experts said Wednesday.

Cuomo said Tuesday in his State of the State speech that he’s including in his budget for the current fiscal year a plan to make cannabis legal for adults over the age of 21. The governor is aiming to create a legal industry that would include minority- and women-owned businesses and create jobs in some of the more economically deprived parts of the state. Ten states have so far legalized cannabis for recreational use, while another 33 have legalized medical cannabis.

“Legalize adult-use cannabis,” he said. “Stop the disproportionate impact on communities of color. And let’s create an industry that empowers the poor communities that paid the price and not the rich corporations who come in to make a profit.”

Smoke Wallin, president of California-based cannabis company Vertical Cos., said the move is a significant step forward in the “mainstreaming” of the industry.

“Although the fourth most populous state, after California, New York represents the most influential market for consumers and the steady march toward national normalization,” he said. “We expect the continued state by state liberalization of cannabis use to continue to put pressure on the federal government.”

Rob DiPisa, co-chair of the Cannabis Law Group at law firm Cole Schotz, agreed, noting New York’s influential role in many industries, from fashion to business to entertainment. “This will change everything,” DiPisa said. “Once New York enters the market, we’ll see bright young people come in and challenge the industry.”

Cuomo is expecting to generate about $300 million in annual tax revenue from the new business, although he will include an option for counties to opt out of legal sales, if they choose. Funds raised would be used to finance a state traffic-safety committee, for small-business development, and for substance-abuse services and other programs.

The governor is proposing to impose a 20% state tax and 2% county tax on transfers of cannabis from wholesalers to retailers, along with a $1-per-gram tax on dry flower for growers and a 25-cents-per-gram tax on trim.

That may put a steep burden on companies operating at the wholesale level, said DiPisa, while Cuomo’s intention to include unionized labor in the new industry is a worthy goal that may add still further costs.

“Having seen what we have on the West Coast, when these markets come on line, there is typically high demand at the start, followed by oversaturation that can result in way more cannabis than is needed — and so the price falls,” he said.

In 2015 and 2016, for example, the wholesale price of a pound of cannabis in West Coast states that have legalized recreational cannabis was above $2,000. The comparable price fell below $400 last summer in Oregon, thanks to oversupply, putting pressure on growers.

The other challenges include that cannabis companies need to be well-capitalized but are unable to access capital in the form of capital markets or bank loans. Cannabis is still illegal at the federal level, where it is classified as a Schedule I drug, putting it in the same class as heroin and cocaine. As long as the federal prohibition is in place, companies can’t have bank accounts at federally insured institutions, and they can’t sell product across state lines.

“That’s the Achilles’ heel in this business; normally, if you have a surplus or price plummets, you just ship it to another state, but here you don’t have that option,” said DiPisa.

Vertical’s Wallin said that Cuomo’s revenue projection is conservative and that he would expect revenue from a city as densely populated as New York to be closer to $1 billion, upon full rollout.

“Given that the much smaller state of Colorado is generating several hundred million [dollars] annually, it seems reasonable,” he said. (Colorado’s population is 5.6 million, while New York’s statewide population is more than three times that; New York City’s population alone exceeds 8.5 million.)

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