New York legalized the possession and use of marijuana for adults last year and created a licensing system to govern eventual sales in brick-and-mortar stores. New Yorkers will even be able to get joints delivered right to their doors.
The application window for these licenses closes on Sept. 26. The state anticipates the first legal dispensaries will open before the end of the year. The size of the legal marijuana
market in New York could ultimately be more than $7 billion annually
Politicians are eager to tax and regulate all this commerce. The legal marijuana
market could be the source of massive new tax revenue for New York. Many states have already piled excessive taxes on to legal weed sales. New York is planning an array of taxes, including a complex tax based on potency of the pot and rules preventing cannabis businesses from writing off standard business expenses. That is in addition to a 9 percent overall tax rate. https://www.syracuse.com/marijuana/2022/03/getting-into-the-weeds-of-nys-cannabis-taxes.html
But what legislators ignore is that all these taxes have the perverse effect of increasing black-market demand. After Prohibition ended, people didn’t continue to buy bathtub gin when legal and safer alcohol was available. But states also didn’t massively increase the price of newly legal alcohol to make bathtub gin more attractive. In New York, there is already a burgeoning $2 billion marijuana
black market. https://www.bloomberg.com/news/newsletters/2022-07-18/new-york-s-2-billion-of-illegal-pot-sales-threatens-the-legal-market
Under the new regulations governing Conditional Adult-Use Retail Dispensary licenses, New York is seeking “justice involved individuals” to apply to become licensees. A justice-involved individual is anyone who was “convicted of a marihuana-related offense” for anything from a small amount of pot to a major drug operation. (For some reason, the Office of Cannabis Management insists on spelling “marijuana” with an “h” rather than a “j.”) The program also has a curious legacy benefit. You can claim to be a justice-involved individual if you had “a parent, legal guardian, child, spouse, or dependent who was convicted of a marihuana-related offense in New York State prior to March 31, 2021.”
The logic of the state preference for ex-convicts is based in part on the idea that a history of illegally selling pot constitutes relevant “business experience.” Yet, the experience derived from running a criminal drug operation doesn’t translate well to the demands of a lawful business. Former street-level dealers have probably never struggled with regulatory compliance or tax accounting. Indeed, illegal operations deliberately avoid such responsibilities, preferring the simplicity of cash-for-contraband. As Milton Friedman noted, “the black market was a way of getting around government controls.” That isn’t behavior politicians in Albany or any other state capital should be looking to encourage.
In fact, the former felons with the most “experience” are the ones the state should be most worried about. Large, illegal marijuana farms tend to be associated with criminal gangs and other organized criminal elements. They deal violently with competitors and often set dangerous boobytraps for backpackers who wander unknowingly into fields where marijuana happened to be growing. These marijuana veterans may have lots of experience, but it is not necessarily the type of experience that we want as the foundation for a multibillion dollar market.
New York wants to kickstart the weed market by distributing $200 million from its Social Equity Cannabis Investment Fund to help pay for beneficiaries to set up shops and pay for overhead. Notably, the state indicated that it wants to limit application and documentation requirements
as a way to make licensure accessible. This is money the state should recoup over time if it distributes licenses to competitive applicants. But pushing former criminals to the head of the line doesn’t seem the best way to ensure the money isn’t wasted. What led these ex-cons to commit drug violations was likely money, not marijuana
. Most probably didn’t view pot as a calling.
In the end, the program may not even succeed in keeping dispensaries local. How does New York plan to prevent successful applicants from taking both the subsidies and licenses and selling them to the large corporations that the state supposedly wants to deter? If that happens, and there’s no reason to think it wouldn’t, New York will have succeeded in doing what the market would have done on its own, but at a cost of hundreds of millions dollars to taxpayers.
If anything, marijuana demand increased during the decades of prohibition. The market for legal marijuana doesn’t have to be a mess. States such as New York only need to step aside and allow the market to favor those with the best plans and most experience. Consumers in this and every market benefit from competition, which provides options and lower prices. The state benefits from sensible and fair taxation. None of this means that economics must prevail over equity concerns. But when creating the legal and regulatory foundations for a brand new market, politicians should let commodities take root before harvesting the proceeds.
Mr. Turley is the Shapiro Professor of Public Interest Law at George Washington University.