New York in 'unique position' as it competes with New Jersey for marijuana dollars
New York’s legalization of recreational marijuana last week paves the way for its cannabis market to develop into the second largest in the nation, and it has two key advantages over its neighbor, New Jersey.
The Empire State has a population over 19 million compared to New Jersey's roughly 9 million, and because New York City is typically the most-visited city in the U.S. it could attract so-called canna-tourists.
“I think New York has a unique position just due to its size and tourism,” Kacey Morrissey, senior director of industry analytics, told Yahoo Finance. By 2025, the firm predicts the state will become the second largest U.S. market, behind California.
Still, neighboring New Jersey, which officially legalized recreational weed in February, has its own key competitive advantages over the Empire State — including a high percentage of agricultural commodities produced in environments similar to cannabis, established pharmaceutical and biotechnology industries, and a lower state tax rate for recreational marijuana sales.
'A significant advantage for New Jersey'
New Jersey's recreational marijuana will be taxed at the state's general tax rate of 6.625%, while New York's recreational marijuana legalization law imposes a 13% sales tax on weed sales.
“One thing that does potentially project a significant advantage for New Jersey is the tax rate," New Frontier Data’s Chief Knowledge Officer John Kagia told Yahoo Finance, adding that the difference between the two tax rates "does make New Jersey more attractive."
Still, in New Jersey, the tax for marijuana may end up being higher than 6.625%, because local governments can impose additional taxes on sales between businesses and on sales to consumers, according to Jennifer Benda, a tax attorney and certified CPA who specializes in cannabis regulation.
On top of state sales and potential local taxes, New Jersey imposes a state-level social equity tax on transfers of marijuana from producers to retailers that varies based on fluctuations in marijuana prices. As prices drop, tax rates jump, and vice-versa, Benda said.
New York, on the other hand, imposes a state-level excise tax on transfers of marijuana from producers to retailers that varies based on the amount of THC in a product, in addition to the 13% sales tax.
It's unclear which regulatory structure will lead to lower consumer prices, though New Jersey also has the benefit of allowing adults to possess up to 6 ounces of marijuana, while in New York the limit is 3 ounces.
“Because New York’s state level tax on sales to consumers is higher than New Jersey’s, New Jersey could have an overall price advantage,” Benda said. “This along with New Jersey’s more generous possession limits may help New Jersey businesses boost sales.”
Where will it be cheaper to produce marijuana?
On top of its more generous possession limits and potentially more generous tax scheme, New Jersey may be able to capitalize on its historically less expensive production environment, according to New Frontier's Kagia.
If a pound of cannabis costs $1,000 to produce in New Jersey versus $1,500 in New York, he said, that naturally gives New Jersey a price advantage regardless of its retail tax rates — and without encroaching on profit margins of its operators.
Still, New York’s total agricultural output handily outpaces that of New Jersey’s.
“I would argue that New York has a better opportunity on cultivation because of the upstate areas,” Debra Borchardt, founder and CEO of Green Market Report, said. “Upstate you have lots of cheap land. You have an agricultural culture, anyway. You've got a depressed economy.”
In 2019, according to the USDA, New York producers sold approximately $5.3 billion in agricultural products, versus approximately $1.2 billion sold by New Jersey producers. However, New Jersey’s top agricultural commodities are grown in environments more similar to cannabis, including nursery, greenhouse, and floriculture products, whereas New York's top commodities include cow milk, grains, oilseeds, dry beans, and cattle.
Tourism could give the Empire State a boost
Tax and production costs aside, New Frontier's Morrissey, says over time, she expects New York’s demand to outpace New Jersey’s.
To be sure, New Jersey could see a tourism boost from its legalization of recreational marijuana. While New York receives about double the number of annual tourists, Morrissey said, the cannabis market participation rate by out of state visitors is projected to be slightly higher in New Jersey than in New York. Still, New York visitors tend to spend more aggressively on entertainment, she said.
And although each state’s percentage of regular in-state resident users is expected to be similar, New Frontier projects differences in populations, participation, and spending levels will account for an estimated annual 23 million participating canna-tourists in New York, and 22 million in New Jersey by the 4th year of operational market sales.
New Jersey's marijuana industry could surpass expectations
Could New Jersey's established pharmaceutical and biotechnology industries bolster its cannabis-derived revenues? Kagia said it's not likely in the short term, but could eventually help accelerate product innovation and product development.
"There's not a lot of companies which are willing to invest in that 5, 10, 15-year timeline, when you can open a dispensary and have lines out the door," he said.
"I think, opportunity lies in the middle there where you're taking some of this pharma expertise and using it to produce higher quality, more effective medical cannabis products," he said.
All told, Morrissey said projections for New Jersey's market could be underplayed.
“I’d love to say we have it right, but we have been continuously surprised by participation and spending enthusiasm," she said. "With stark differences in tourism participation and and tax rates, I think that there is a potential for New Jersey to grow more than we're projecting.”
Alexis Keenan is a legal reporter for Yahoo Finance and former litigation attorney.
Follow Alexis Keenan on Twitter @alexiskweed.
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