Will Legal Weed Rid NY of Black Market Sales? Some States Have Done Better Than Others

New York State is expected to allow the first legal recreational cannabis dispensaries to open for business before the year is out. It is one in a long line of states and countries to legalize pot, which gives it the benefit of seeing how things have been done elsewhere – following what works and tossing what doesn't.

The state's goals of cannabis legalization include raising money through taxation and squashing illegal activity supporting black market sales of the drug. Results have varied elsewhere. Will Western New York fare better?

That depends on the tax rate, consumers' access to legal weed and a competitive price, experts say.

"We're not the first to do this, so we can learn best practices from our predecessors," said R. Lorraine Collins, a dean at the University at Buffalo's School for Public Health.

Taxes

Other states have taxed cannabis at such a rate that legal sellers cannot remain competitive with black market sellers. But experts note that taxation and the public services taxes pay for are a primary motivation for legalizing cannabis.

"Taxation is kind of an integral part of retail. And why would we think that the taxes on cannabis should somehow not conform to the taxes that we place on other products?" said Collins.

Tax revenue from cannabis sales have been earmarked for education, community reinvestment and drug treatment.

New York State retail tax rates of adult-use cannabis have been set at 13%. Taxes are expected to raise $1.25 billion over the next six years, according to the state budget.

"In general, I think it's a reasonable tax rate," Collins said.

It's much less restrictive than Washington's 37% tax rate and less onerous than California's complicated tax structure, which includes local and state excise and sales taxes, and a slew of local taxes; and can add from between 28% to 40% to the cost.

Access

The fewer legal weed retailers in a state, the stronger its black market, according to an analysis by the website Leafly, which runs an online cannabis marketplace, and Whitney Economics, which consults with the cannabis and hemp industries. In 2021, more than half of California's $11.5 billion in cannabis sales went through the black market and into the pockets of drug cartels and dealers, the Leafly analysis estimated. That's because roughly two-thirds of the state's municipalities have opted out of legal pot sales.

The report tied California's opt-out laws to the state's thriving black market. Where municipalities opted out of legal pot sales, the illicit market flourished. Simply put: If consumers can't buy weed legally, they will get it the old-fashioned way. Cartels and dealers know that, and it affords them a lucrative opportunity.

But where there is easy access to legal cannabis shops, black market sellers go out of business. In other words, Leafly said, opting out of legal weed sales doesn't stop weed sales, it just stops legal, regulated ones.

Access to legal weed is much greater in Montana, where there are 39 recreational dispensaries per 100,000 residents, compared to California's 3 shops per 100,000 residents. The difference is striking: 78% of cannabis sales in Montana take place in the legal market.

So what does that portend for Western New York? It's worth looking at how many municipalities have opted out of recreational cannabis sales locally.

Nearly half of all municipalities in Erie County have opted out, including the Town of Clarence and the villages of Hamburg, Orchard Park and Williamsville, according to data from the Rockefeller Institute of Government. Another 60% have opted out in Niagara County, including the towns of Niagara, Pendleton and Wilson.

Often, an opted-out village is located inside a town that has opted in.

That is the case in the Village of Hamburg. It held public hearings on the topic of legal cannabis sales in the village and made a decision after weighing resident feedback.

"The Village Board thought it would be best not to opt in at this time," said Mayor Thomas P. Tallman. "There are still too many unknowns."

During the first round of licensing, the state issued 150 Conditional Adult-Use Retail Dispensary permits to retailers who will open recreational pot dispensary shops in space secured by the state Dormitory Authority. To qualify, applicants had to show they or a close relative had been arrested for a pot-related offense (in an effort to restore those previously harmed by the war on drugs) and had experience owning a profitable business of any kind.

Of those initial licenses, 11 will be given for use in Erie, Niagara, Allegany, Cattaraugus and Chautauqua counties. That comes out to one for every 128,837 people in the region. The state is ramping up for a second round of licensing – without the CAURD conditions – but it has not said how many it will ultimately issue.

"New York State is trying to have retail available in a reasonable way, so that people are not driving from Buffalo to Syracuse in order to find a retail outlet,” Collins said. “In general, where we have larger population centers, the plan and hope is to have retail access.”

Price

Taxes are just one layer of cost that is added to the legalized product.

It costs money to cultivate, process and regulate cannabis – which includes tracking, testing, packaging, labeling and inspection. There are also the added costs of a trained sales force, retail space and marketing. (It's unclear how much the retail properties secured by the state Dormitory Authority will cost.)

It's a far cry from the black market, where no one is held accountable for things like adulteration, potency, harmful additives, fertilizers or pesticides.

"I mean, let's face it, the illegal market is run by criminals. If they choose to stay out of the regulated market, they can do whatever they want," Collins said.

Pot retailers will be challenged to keep pricing competitive, even though the regulated product and unregulated product are not created equally. If they're not able to keep prices right, some customers will gravitate back toward illicit dealers where they can buy weed less expensively.

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