Gov. Andrew Cuomo has included cannabis legalization in his budget proposal and plans to work with neighboring states

Cannabis advocates are cautiously optimistic that 2020 will be the year that New York state finally legalizes marijuana for adult recreational use, marking a milestone for the legal business.

Gov. Andrew Cuomo has included legalization in his budget proposal for the new fiscal year, projecting it could generate $20 million in revenue in fiscal 2021, growing to $63 million by fiscal 2022 and $188 million by fiscal 2025.

Passage of such legislation is not a sure thing, however.

A similar effort last year fell apart when lawmakers were unable to agree on the details, specifically the correct measures to ensure that the communities that were disproportionately punished during the 40 year long U.S. “war on drugs” would benefit from a new legal industry.

Crystal Peoples-Stokes, a Democrat from Buffalo who is New York state Assembly Majority Leader and pro-legalization, welcomed Cuomo’s proposal.

However, “the only legislation that I can support will include a statutory commitment of significant resources directed to communities harmed by mass incarceration resulting from the so called war on drugs, and a robust economic and social equity plan for access to the new industry,” she told MarketWatch in emailed comments.

Cuomo is taking a different approach this year with plans to create a new Office of Cannabis Management to specialize in cannabis regulation and create the framework for medical, adult-use and hemp programs.

Central to the plan are provisions to ensure social equity licensing opportunities. Sales will be restricted to adults of 21 years of age and older and quality controls will be used to ensure the safety and potency of products, including labeling, packaging, advertising and testing.

“These efforts will be done in coordination with neighboring states Connecticut, New Jersey and Pennsylvania,” Cuomo said in a statement. Further plans include the creation of a Global Cannabis and Hemp Center for Science, Research and Education with SUNY and other partners.

Experts agree that the time is ripe for New York to fully legalize the drug with public support at an all-time high. A Siena College poll released on Monday found voters in favor of legalization by a 58% to 38% margin, the highest level yet recorded by Siena.

Rob DiPisa, co-chair of the Cannabis Law Group at law firm Cole Schotz, said he’s hopeful but also a bit skeptical about a deal being done. “It’s the same lawmakers and the same issues,” he said.

Still, the state’s $6 billion budget deficit may persuade some skeptics of the need to create a new revenue source and taking a unified approach with other legislatures may also act as a catalyst, he said.

“Cannabis alone can’t plug all the deficits, but it can be part of a cocktail of revenue generation,” he said. “And working with neighboring states makes sense to ensure the tax structures are similar and discourage cross-border buying that would sees states compete for revenue.”

Coming a little late to the cannabis party — 11 states and the District of Columbia have already passed laws legalizing recreational cannabis use — gives New York the advantage of learning from others, said DiPisa.

“They are taking some social equity measures from Illinois. So far, no state has got everything right,” he said. Illinois started legal sales of cannabis on Jan. 2.

Then there is the thorny issue of taxation.

Cuomo is proposing three levels of taxes, starting with a 20% tax on the sale of product to a retailer. Cultivators would be taxed at the rate of $1 per dry weight gram for flower, at 25 cents per dry weight gram of cannabis trim, and at 14 cents per gram of wet cannabis. Local counties or cities with a population of 1 million or more would be entitled to another 2% sales tax.

As California companies know all too well, high taxes can have the effect of truly crippling the nascent sector as it makes it all but impossible for companies to compete with the black market, which continues to dominate in the Golden State.

A recent report by Boulder, Colorado-based BDS Analytics and San Francisco-based ArcView Market Research found that about 80% of cannabis transactions in California are black-market deals, eating into the revenue available to legal players.

A slow and complex licensing process in California has also meant fewer store openings than expected, further exacerbating the problem. Companies unable to access the market are now running out of money, and many are laying off staff, cutting costs and getting creative with fundraising.

The situation is almost as dire in Canada, the first G-7 country to legalize weed for adult use in October of 2018. Canadian companies have also suffered from a slower-than-expected rollout of retail stores that has allowed the black market to thrive. MKM analyst Bill Kirk said the “stubborn” price gap between legal and illicit weed is encouraging Canadians to use the black market. The average legal price in the fourth quarter was C$10.30 ($7.83) a gram in the legal market versus C$5.74 a gram in the illicit market.

Cristina Buccola, founder of Cristina Buccola Counsel PLLC and a former general counsel at publication High Times, said taxation is key. “If it’s too high, it shuts down the industry before it begins.”

But it’s also important how tax revenue is spent and Buccola would prefer to see a plan to reinvest some of the money raised in services for the very communities that were devastated during the years of prohibition.

“Plenty of people who have been negatively affected by prohibition might not want a license, for example,” she said. “But they might want to work on mental health issues, or job training. That’s the kind of community reinvestment we need to see.”

Buccola agreed that addressing New York’s enormous illicit market is a challenge, but a key factor in creating a viable industry. “It’s about bringing the actors from the legacy market over to the legal market and that will take time. We need to ask what services those people need to make that change.”

Whatever happens in 2020, experts agree that New York is a major market for the industry and bringing in New Jersey, Connecticut and Pennsylvania at the same time would be a big move forward.

“Those are monster markets and we already have Massachusetts,” said Korey Bauer, portfolio manager at the Cannabis Growth Fund from Foothill Capital Management. “It would be a big step forward to descheduling at the federal level.”

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