ALBANY, N.Y. (WTEN)- New York has joined neighboring Massachusetts in the legalization of adult-use recreational marijuana. Many of the details regarding New York’s marijuana legislation still have to be decided but the state has proposed a 13% sales tax.

The proposed tax rate of legal marijuana in New York is significantly less than Massachusetts 20% but that wasn’t true when Massachusetts first approved the sale of recreational pot.

When legalized in Massachusetts in 2016 it was approved with a 12% sales tax. That quickly changed when the tax rate was bumped up to 20% in 2017, according to the state’s Cannabis Control Commission (CCC).

The reason for the tax hike? Concern that the tax levy wasn’t high enough when compared to other states where the sales tax on recreational marijuana is between 25-37%, according to a report that looked at alternative tax strategies published in July 2020 on the CCC’s website.

The benefits of increasing the tax rate beyond 20% do not outweigh the risk, the report said. An increase to 25% would cause price instability, would not generate more tax revenue long-term and would cause consumers to purchase marijuana illegally threatening dispensaries.

New York’s legislation estimates the potential for tax revenue at $350M a year. The state’s marijuana legalization impact assessment published in 2018 used tax estimates of between 7% and 15%.

Low estimates for marijuana tax revenue ranged between $248.1-$340.6M with high estimates ranging between $493.7-$677.7M, based on the report.

Estimated revenue from marijuana sales

Retail price of $297/ounce

Tax rate7% 15%
Retail sales$1.6B1.4B
Retail tax$110.3M$215.2M
State & local sales tax$137.8M$125.4M
Total tax revenue$248.1M$340.6M
Source: Assessment of the potential impact of regulated marijuana in New York State

Retail price of $374/ounce

Tax rate7%15%
Retail sales$3.1B$2.9B
Retail tax$219.5M$249.6M
State & local sales tax$274.2M$249.6M
Total tax revenue$493.7M$677.7M
Source: Assessment of the potential impact of regulated marijuana in New York State

Will New York’s tax on marijuana increase over time?

With limited data from only a handful of states that have already legalized recreational marijuana and no previous market data to go on, New York’s marijuana legalization impact assessment uses many assumptions regarding sales.

Ongoing evaluation of the market will need to take place once sales are allowed to get a better sense of its financial impact but there is an argument for keeping the tax rate low, the report said.

If the state can’t compete with illegal marijuana market prices, it won’t be enough to entice users to purchase it legally.

Some states had to lower their initial tax rate since a higher price did not incentivize consumers to move from the unregulated to the legal market. If a significant price difference exists between recreational and medical marijuana, consumers will likely prefer the lower price product which is why the ability to adjust or index tax rates to address realities in the market has proven beneficial.

Source: Assessment of the potential impact of regulated marijuana in New York State

A 2019 report from the New York Bar Association regarding marijuana legislation came to the same conclusion, stating low tax rates were on the whole good for the marijuana economy.

“A pattern appears to be emerging, however, indicating that a lower rate of tax returns higher per capita tax revenues and fosters a robust and thriving market while simultaneously discouraging (the) growth of the gray and illicit market,” the report said.

NEWS10 reached out to Governor Andrew Cuomo’s office to find out the state’s formula for the $350M annual estimate of tax revenue related to the sale of recreational marijuana but has yet to get a response.