“Without this vital tax relief, artisanal producers will struggle to compete effectively with companies that operate facilities more than twenty times their size.”
By Ari Hoffnung, Bridge West Consulting
New York’s multi-billion dollar adult cannabis market will require six million square feet of grow space to meet annual consumer demand for more than one million pounds of cannabis. While the intent of the Marijuana Regulation and Tax Act (MRTA) is to limit “market dominance” by a few large corporations, there is a real risk that the state cultivation market will be controlled by a small number. major operators. After all, public cannabis companies have access to billions of dollars in capital and are able to achieve economies of scale inaccessible to artisanal producers, especially those led by social equity entrepreneurs.
Fortunately, New York has a strong track record of helping craft businesses in other industries compete effectively with large operators. Perhaps even more than cannabis, the beer industry is dominated by a few very large companies. In fact, three liquor companies control about 70% of the beer market. Nonetheless, New York has a thriving craft beer industry, with more than 440 licensed breweries responsible for over 20,000 full-time jobs and an economic impact of $3.4 billion.
While there are many reasons why New York has become a national leader in the craft beer industry, it wouldn’t have been possible without the tax benefits given to small beer producers. At the federal level, small domestic brewers enjoy an 80% excise tax reduction, while at the state level they are exempt from excise tax.
To create a thriving craft cannabis industry in New York, craft producers should receive tax relief similar to that offered to craft breweries. Specifically, the state should waive the MRTA excise tax of approximately $350 per pound of cannabis for the first 2,000 pounds produced by artisanal growers operating 10,000 square feet or less of flowering canopy space.
By eliminating the excise tax for artisanal producers, these small business owners could keep 100% of their wholesale revenue. For example, if the wholesale market price, with excise tax, for a pound of cannabis was $2,350, artisanal producers would keep all of that amount. In the same example, large operators would have to pay an excise fee of $350 and would only have $2,000 in revenue.
Although excise tax exemption for artisanal producers may result in a slight drop in tax revenue for the state, it will help to limit market dominance by a few large operators. Without this vital tax relief, artisanal producers will struggle to compete effectively with companies that operate facilities more than twenty times their size.
There are other smart policies the state could adopt to help ensure the success of the cannabis craft industry. To help small-scale producers finance their multimillion-dollar capital expenditures and start-up costs, the state should offer zero-interest or low-interest loans. Unlike dispensaries, which can earn income the first day they open, artisanal growers cannot earn income until they complete their first harvest and successfully test their flower in a third-party lab, a process that will take months. Additionally, small businesses like craft growers cannot afford to suffer years of financial loss like so many of today’s public cannabis companies that depend on a steady stream of debt and equity financing to stay in business.
Additionally, New York should create a Certified “Craft” designation for small growers and limit the use of the term “craft” on cannabis product labels and in marketing to those who are certified. This will help consumers more easily identify authentic craft cannabis products at dispensaries and support small growers across the state. Without this regulatory approach, large operators will widely use the term “craft” attractive to consumers.
The state should do more than prioritize licenses for small growers. By acting now to create a fertile environment for the growth of craft cannabis, New York City policymakers can help position the state for the inevitable future in which cannabis is federally legalized. Once interstate commerce is allowed, growers in New York will be forced to compete with growers across the United States, many of whom operate in more favorable growing climates. Artisanal growers who grow high-quality cannabis locally, sustainably, will be better protected against future legislative upheavals. The policies we enact today for craft growers will impact the reality of tomorrow that could see Humboldt County cannabis legally delivered to New York’s doorstep by FedEx or Amazon.
Ari Hoffnung launched the Opportunity Grows cannabis accelerator, in conjunction with SUNY Binghamton’s Koffman Incubator, to help social equity entrepreneurs succeed. He is the CEO of Bridge West Consulting and previously served as CEO of New York’s Vireo Health and Deputy New York City Comptroller.
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Photo courtesy of Chris Wallis // Side Pocket Images.
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