New York Governor Andrew Cuomo announced that recreational cannabis was not likely to be included in the budget as the state missed the March 31st deadline. New York is leading the country in COVID related costs associated with the high infection, death rate, and unemployment. These costs exacerbate the lost tax revenues, which is expected to create a budget gap of $10 billion or more. Governor Cuomo is contemplating cuts to social programs as there is “no money.” As New York is the COVID-19 leader, this trend will replay itself across the country as the pandemic spreads.
New York and other stay-at-home states designated the cannabis industry as “essential businesses”. Marijuana sales soared in these states as consumers stocked up their supply. The impact on illicit market sales is yet to be seen.
To date, cannabis businesses are operating during a national emergency without major issues. This wartime test may provide the evidence needed for states and cities to permit commercial cannabis businesses as a way to close the budget gaps, increase consumer safety, and dampen illicit market sales that thrive in the absence of legal cannabis products.
New York estimates that the market for marijuana is $3.1 billion. Cannabis sales in New York are expected to generate over $770 million. This type of revenue growth is rarely available to states and cities. Cannabis tax revenues were needed pre-COVID in cash strapped states like Connecticut, New Jersey, and West Virginia. We would also expect that these states and many California cities to reconsider commercial cannabis as a means of recovery from the COVID-19 downturn.
Consumer Safety and the Illicit Market
The bigger issue may be the growth in the illicit market in the absence of legal cannabis. The stay-at-home orders and safety concerns may impede consumers from traveling to dispensaries in other cities. Illicit cannabis distribution may be filling this void. California municipalities may determine that it is safer to allow a local dispensary rather than seeing an increase in illicit activity during emergency events.
Local availability of legal cannabis products will continue to be important as social distancing requirements are expected to be extended throughout the year. We expect the number of cities that permit cannabis sales to increase as residents seek legally tested products and cities see increased illicit market activity.
New York’s failure to legalize cannabis as a part of the state’s budget process is a minor setback. We expect that New York, Connecticut, and New Jersey will seriously work on legalizing cannabis as a means of reducing budget gaps. We would also expect the market to expand in California and Michigan as cities deal with increased illicit market activity and budget constraints.
To date, the cannabis industry faced its first market disruption without major headlines or safety concerns. This major test may push emerging markets over the edge as the industry demonstrated that is ready to expand and assimilate. Get ready to grow!