by Michael C. Dorf
Just before the new year and almost two years after the passage of the law permitting the sale of recreational marijuana in New York State, the first dispensary in the state opened for business in lower Manhattan. I expect that eventually cannabis dispensaries will become fairly common in New York State, but so far the rollout has been quite slow. Meanwhile, the combination of decriminalization of possession and the dearth of legal dispensaries has led to what I imagine is at least a temporary flourishing of the illegal marijuana distribution business: increased demand from New Yorkers who might have been deterred from purchasing marijuana by the old enforcement regime will have been met by marijuana dealers operating outside the law.
In the long run, however, one would expect that the illegal market will shrink once the legal market expands. How much it shrinks depends on a number of factors. Municipalities may opt out of permitting dispensaries (thus relegating marijuana buyers in those places either to traveling substantial distances to purchase from legal dispensaries or to purchasing locally from illegal sellers). Even when a municipality does not opt out entirely, it can register objections to particular dispensaries. Meanwhile, in New York, as in other states, marijuana buyers are likely to be sensitive to perceived quality differences and price differences between what's available legally versus illegally. New York's 21.5% tax on legal sales is lower than in some other states but hardly trivial. Further, dispensary operators have substantially higher overhead costs than illegal dealers do. Accordingly, price-sensitive marijuana purchasers might prefer to take the risk of buying from illegal sellers even after dispensaries become more widespread. And state law forbids dispensaries to sell to people under the age of 21, some of whom will continue to buy their weed from illegal sellers.
Accordingly, at some point the market for marijuana in New York will equilibrate with a mix of state-licensed and illegal sellers. So why is it taking so long? A big part of the answer is that New York doesn't allow just anyone to open a dispensary. Among other things, the selection criteria for running a dispensary set forth in the regulations require that "justice involved" individuals have a controlling interest in the business. Someone is "justice involved" if they or a close relative were convicted of a marijuana offense before the enactment of recreational marijuana legalization. Non-profits that serve the public interest in various ways defined by the statute and regs can also operate dispensaries, but the NY law, as written and implemented, gives a preference to people who were caught up in the war on drugs. Is that legal? Is it sensible? Let's consider.
In asking whether the NY regime is legal, I don't mean to get into the question of legality under federal law, which continues to treat "marihuana" as a Schedule I substance. For several years, Congress, in funding the Department of Justice, has forbidden the expenditure of funds to enforce (and thus, as a practical matter, the enforcement of) the federal marijuana prohibition with respect to state-legal medical marijuana, but no such limitation applies to state-legal recreational marijuana, which operates by the grace of the DOJ, and even then in a somewhat murky legal position. State-authorized sellers are unable to accept credit cards or open accounts at major banks.
Those sorts of problems beset marijuana dispensaries everywhere but, judging by the large number of such businesses I notice whenever I visit either of my daughters (who go to college in Colorado and Massachusetts), the illegality of recreational marijuana under federal law is not a substantial obstacle to opening and running a dispensary. New York's laws add an additional level of complexity.
Part of that complexity may itself be unlawful. In November of last year, a federal district judge preliminarily enjoined New York's licensing preference for people who had been convicted of New York marijuana offenses on the ground that the plaintiff--a company that is 51%-owned by a person with a marijuana conviction in Michigan rather than New York--would likely prevail in its contention that the New York law and regs violate the Dormant Commerce Clause (DCC). The court actually enjoined the granting of any new cannabis licenses in multiple regions of New York (including Ithaca!).
How will that ruling fare on appeal? The opinion notes that the state offered no cogent explanation for how the NY preference could survive heightened scrutiny under the DCC, which is at least a little odd, given the obvious argument for the state. NY can claim that the preference is a kind of compensation to victims of NY's war on drugs. Someone who has a Michigan conviction for marijuana is a victim of a war on drugs, but not of New York's war on drugs. Thus, the argument would go, the state defines a "justice involved" individual as someone with a NY conviction but not those with convictions from other states in order to serve its remedial purpose: NY State wants to benefit those it has wronged; it's up to other states to decide whether and how to compensate those people they wronged with their marijuana laws.
Whether that or some other argument succeeds on appeal remains to be seen. For now, I want to move past the legal question to address a policy question. Let's assume (as I think is in fact true) that people who were convicted of marijuana offenses without any accompanying acts of violence suffered an injustice for which the state has an interest in providing--or perhaps even a duty to provide--compensation. Nonetheless, giving businesses owned by justice-involved persons priority for dispensary licenses is hardly the best means of providing such compensation.
Based on the number of dispensaries one sees in other states, the high end for the likely number in New York State when fully ramped up is probably under a thousand. That's fewer than one dispensary for every 160 people who have relevant convictions. It's thus hard to see the license preference as doing much work to compensate the vast majority of victims of the drug war in New York.
To be sure, there are other benefits. The 21.5% tax figure I quoted above reflects the sum of a 4% local tax, a 9% state excise tax, and a further tax based on the quantity of THC purchased. For cannabis flower that tax is $0.005 per mg of THC. My back-of-the-envelope calculation based on the price, weight, and concentration listed on the website of the first legal dispensary in New York indicates an effective tax rate of about 8.5% (math below in a postscript).
What does the state do with that revenue? After setting aside administrative costs, the local tax goes entirely to local governments. The remaining 17.5% tax revenue (after administrative costs) is divided as follows: 40% for education programs administered by the state lottery fund; 40% for the Community Grants Reinvestment Fund, which funds a variety of projects, many of which have nothing to do with drugs or convictions for marijuana offenses; and 20% to the Drug Treatment and Public Education Fund, which involves drug issues but is not targeted as compensation for people who were convicted of marijuana offenses.
Accordingly, although the state will use the substantial revenue generated by the marijuana tax for worthwhile public projects, at most a very small fraction of that tax revenue will benefit "justice involved" individuals. That leads to two conclusions:
(1) The state is unlikely to prevail on appeal in the DCC case by arguing that the licensing preference is narrowly tailored to provide compensation to people who were convicted of marijuana offenses because the vast majority of them won't be able to open dispensaries and will not receive much if any benefit from the taxes on marijuana sales.
(2) In order to benefit victims of the state's past war on drugs, New York would do better to earmark more of the tax money to be paid them directly as compensation. Such a move could be accompanied by a relaxation of the criteria for operating a dispensary. The larger number of businesses that would then be eligible could ramp up their operations more quickly and would probably be better at attracting customers away from the illegal market as well as at maximizing revenues for the tax base.
Postscript to explain how I arrived at the 8.5% figure. The dispensary website lists a price of $40 for 1/8 of an ounce of hybrid cannabis that's 19% THC. So we have:
((1/8 oz) x (28350 mg product/oz) x ((0.19 mg THC/mg product) x ($0.005/mg THC) x 100% )/$40
= 8.4% of the sales price. I rounded up to 8.5% because some products have a slightly higher THC concentration for the same sales price.
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