By Ari Hoffnung and Susanna Short
The more than 40 million tri-state area residents of New York, New Jersey, and Pennsylvania are likely to grapple with the economic and social aftermath of the pandemic for many years. With the keen understanding that “state boundaries mean very little to this virus,” we are all learning how essential it is for our region’s governments to coordinate their policies. One area ripe for collaboration is adult-use cannabis policy.
In 2019, a Regional Cannabis Summit gave hope for a collaborative approach. Now that our states are moving forward with phased re-openings, we ought to re-engage in regional discussions. After all, we have the opportunity to create a regional cannabis market that will eclipse the largest regulated adult-use markets on the planet – namely Canada, California, and Colorado – and generate more than $1 billion of new tax revenues for the region.
Each of the three states is uniquely positioned to benefit. The Garden State is poised to be the first to legalize – through the ballot question that voters will address on Nov. 3. The Empire State, home to close to half of the population in the three states, will ultimately have the largest cannabis market in the northeast, while the Keystone State has the most developed medical cannabis infrastructure and is best positioned to transition to adult-use.
There are many reasons to coordinate cannabis policy, and the magnitude of the budget deficit estimates coming out of Albany, Trenton, and Harrisburg amplify the need for collaboration around tax policy.
The task at hand requires balancing the need to maximize revenues for the public good – like investments in education, infrastructure, and the communities adversely impacted by the War on Drugs – with the need to keep taxes at reasonable levels so the newly regulated industry can compete on price and ultimately eliminate the robust illicit market.
To date, each of our states has proposed different problematic tax structures, and there is an opportunity to learn from other states and move forward in a more coordinated manner. To this end, we recommend that our region adopt three innovative cannabis tax strategies.
Our first and most critical recommendation is to urge our three states to synchronize tax rates. Not too long ago, cars with New York license plates would line up at New Jersey gas stations to enjoy the significantly cheaper gas prices of up to 40 cents a gallon. Similarly, citizens of southeastern
Pennsylvania and southern New Jersey frequently travel to Delaware to benefit from that state’s zero percent sales tax.
If we do not implement similar cannabis tax rates, consumers in higher-tax states will shop in lower-taxed bordering states, adversely impacting tax collections and employment rates in their home state. Over time, the losing home state would likely decide to lower its tax rate below its neighboring state, which would kick off a classic “race to the bottom,” which benefits nobody.
Our second recommendation is that the states levy a potency tax instead of the traditional ad-valorem percentage-based tax. Similar to how alcohol is taxed, with higher rates on liquor than on beer, a potency tax would impose higher taxes on products that contain more THC (the primary intoxicating compound in cannabis).
A potency tax achieves several policy goals. Unlike a percentage-based tax, which results in lower tax revenues as prices decline, a potency tax ensures that the downward pressure on prices does not result in dwindling tax collections. Further, a potency tax promotes temperance, a sensible public health policy goal for non-medical consumers.
Our final recommendation is to phase in cannabis taxes over a multi-year period. If taxes are initially too high, consumers will stay in the illicit market, and tax collections will fall painfully short of their potential.
Just as our governors have skillfully coordinated their pandemic responses, they ought to collaborate on cannabis policy, which intersects with public health, economics, and social justice. To be clear, we do not view legalization as a panacea for a full economic recovery or racial reconciliation, but we do believe that smart cannabis policy could help our region heal more quickly.
Working together we can create a regional cannabis market that will not only maximize tax revenues but also maximize justice for our communities.
The time to legalize is now.