A number of NY lawmakers are hoping to revamp the state’s tax regime for recreational marijuana. They believe doing so will help the emerging adult-use market thrive but will simultaneously putting a damper on the black market. Good luck with that. The proposal is little more than a political fantasy put forth by people would do not understand fundamental business principles.
In theory, the proposal simplifies how taxes are assessed against marijuana businesses. It would replace the current potency tax with a larger excise tax to be applied more evenly across the sector. No doubt the proposal would make marijuana taxes simpler. But it will not have any effect on the black market. To think otherwise is inexplicable.
Taxes Equal Higher Retail Prices
Apparently, the lawmakers behind the tax proposal believe that the current potency tax is making it impossible for legal marijuana sellers to compete with the black market. They are half right. They are right in the sense that taxes equal higher retail prices. They are wrong in the sense that there is nothing inherent to a potency tax that makes it any more anti-competitive than an excise tax.
The fact remains that black market operators do not pay taxes. They do not apply for expensive state licenses. They do not put money into making sure their operations are compliant with state law. All of this equates to very little overhead and, ultimately, lower retail prices.
To be as blunt as possible, black market operators can sell their products dirt cheap compared to licensed dispensaries. Simplifying the tax scheme is not going to change anything. People will still be able to buy marijuana on the street for less. They will continue to do so with impunity. That is how economics work.
The Black Market Is Everywhere
NY isn’t the only state doing battle with marijuana’s black market. The black market is everywhere. It’s even in conservative Utah, where there is now a proposal on the table to allow medical cannabis processors to sell directly to patients via home delivery.
According to the Pure Utah medical cannabis pharmacy in Payson, state law currently requires that all cannabis home deliveries originate at a licensed pharmacy. There are only fifteen licensed pharmacies covering the entire state. All but one is located in major urban centers. So guess what? Home delivery in the most rural portions of the state isn’t financially viable.
Utah lawmakers are smart enough to know that the black market supplies medical cannabis to rural residents living outside the reach of a local dispensary. They believe that allowing processors to sell directly to consumers is a viable way to address the problem, partly because processors could sell at wholesale prices.
The question is whether wholesale prices are lower than black market prices. And even if they are, solving the home delivery problem for consumers only creates a problem for dispensaries. The limited number of dispensers in Utah will not be able to compete with processors or black marketers. They run the very real risk of going out of business should the proposal pass.
Regulation Always Has Consequences
The truth is that regulations always have consequences. If lawmakers know that, they sure behave as though they don’t. In New York, simplifying the tax scheme will have no measurable impact on the black market. To think it will is to believe in a fantasy. Meanwhile, trying to promote home delivery by allowing processors to sell direct to consumers has its own consequences. It is just as much a fantasy to believe that doing so won’t harm licensed dispensaries.