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Cuomo: Legalize and Tax Pot to Bring N.Y. $300 Million (1)

Jan. 21, 2020, 8:59 PMUpdated: Jan. 21, 2020, 10:36 PM

New York Gov. Andrew Cuomo (D) is calling for the legalization of recreational marijuana as the state looks to fill a projected $6 billion budget gap.

Cuomo on Tuesday released his $178 billion spending proposal for fiscal 2021, an increase of about 1.2% over the current year, according to a 152-page budget briefing book released with his speech.

The proposal includes a 20% state tax on marijuana. Once fully rolled out, the plan is expected to bring in $300 million in tax revenue, according to the governor’s office.

The proposal to regulate and tax marijuana came alongside plans to revive a state Medicaid team to identify $2.5 billion in health care savings. Medicaid shortfalls account for a large part of the budget gap.

Cuomo’s proposed budget would continue middle-class tax cuts for residents earning under $300,000 a year, and doesn’t include tax increases. The governor said that the $10,000 federal cap on deductions for state and local taxes had worsened New York’s financial condition, making it a bigger challenge to maintain “fiscal discipline.”

Lawmakers, however, might push for more spending. A coalition of progressive activist groups called on Cuomo and the Legislature to adopt tax policies that would create new revenue sources for services and cut economic development tax breaks for corporations.

Cuomo has 30 days to file amendments to his executive budget proposal. Lawmakers will pore over his plan and release their own budgets in the coming months, kicking off negotiations. The final state budget deal is due by March 31, the end of the fiscal year.

Legalizing Pot

New York would become the third state to legalize the drug through a legislative vote—rather than a ballot initiative—following Vermont and Illinois, according to the National Conference of State Legislatures.

Cuomo last year pushed to legalize marijuana, but the proposal failed to make it through the legislative process. Lawmakers in 2019 instead passed a measure decriminalizing the possession of small amounts of marijuana.

The governor now is calling for creation of a comprehensive cannabis program in coordination with New Jersey, Connecticut, and Pennsylvania.

His plan includes a 20% state tax on marijuana sold by a wholesaler or retailer and a 2% tax that would go to the county where the dispensary is located or—in language aimed at New York City—a city with a population of 1 million or more. Growers would also face a tax of $1 per dry-weight gram of cannabis flower, $0.25 per dry-weight gram of other parts of the plant known as trim, and $0.14 per gram of wet cannabis.

The proposal would create a new Office of Cannabis Management to oversee regulation and would include a statewide education campaign. The plan would limit the sale of cannabis to adults over 21.

Tax Proposals

Cuomo used his executive budget presentation to lash out again at the federal tax reform law’s cap on the state and local tax deduction, saying that since the SALT cap started in 2018, data show that the state’s real estate market is “slowing and even declining,” particularly at the high end. Anecdotal evidence also points to out-migration among the state’s top earners, he said.

“These migration patterns present a significant risk to the progressive government New Yorkers have voted for,” Cuomo said. The state collects nearly half of its personal income tax revenue from the top 1% of taxpayers, and over one-quarter from some 9,000 taxpayers that make up the top 0.1%, he said.

The new budget’s “fiscal discipline” for a tenth consecutive year, he said, “continues the state’s efforts to strengthen its economy despite the federal government’s efforts to undermine it.”

Cuomo touted the third annual phase of personal income tax cuts set in 2016. Earlier changes, made between 2008 and 2015, he said, boosted millionaires’ share of the total tax burden by 21% in that period, as the tax burden for people earning $50,000 or less dropped by 41% and for people earning $100,000 or less dropped by 27%.

He led his new tax proposals with a plan to cut the corporate tax rate for S corporations, partnerships, and other small pass-through businesses by almost 40% and give farmers better tax treatment.

The newly proposed small business tax cut would lower the current rate to 4% from 6.5% for corporations with fewer than 100 employees and less than $390,000 in income. Some 36,000 taxpayers meet that definition. The 6.5% rate itself was the product of a corporate franchise tax-reform package adopted in 2014, when it was cut from 7.1%.

Among other tax proposals in the executive budget proposal were extension and enhancement of the state Excelsior Jobs tax credit program, setting new credit caps through 2039 and allowing use of unused credits through 2049. Credit rates would be boosted for environmental “Green Projects.”

  • Also, the state child care tax credit—one of only six in the U.S.—would be extended to cover children younger than 4. It’s now available for children from 4 to 16. A credit for long-term care insurance, now among the most generous in the U.S., would be limited with a cap and income eligibility rules.
  • The $420 million annual film production tax credit program would be extended by one year, through 2025, while trimming it and setting new eligibility minimums.
  • Tobacco taxes would be raised with a proposal to close a loophole that allows distributors to use an industry standard as their wholesale price, even if they actually paid a higher price to manufacturers, and cigarette tax enforcement would be stepped up. In another plan, criminal tax fraud statutes would be updated to allow for charges against tax preparers.
  • Owners of converted condominiums outside of New York City would get lower property taxes through a plan to allow municipalities to put them in the same category, known as a homestead class, as other residential properties.

Medicaid Redesign

Cuomo provided details on how the state plans to close the Medicaid gap, with a proposal to relaunch the Medicaid redesign team, a multi-stakeholder group that found ways to cut spending over several years beginning in 2011.

The team must report back to the governor before the state budget is due on April 1. It is expected to “find solutions through industry efficiencies and/or by relying on new resources provided by the industry itself,” according to the briefing book, and “must also root out waste, fraud and abuse.”

Starting in fiscal year 2015, the state began taking on 100% of local Medicaid spending growth, allowing localities to stay under the state’s 2% property-tax cap. The spending growth equates to more than $4 billion this year, $2 billion of which came from New York City, according to the state budget office.

Cuomo’s proposal includes further incentives to municipalities to limit their Medicaid spending. The plan would penalize municipalities where local Medicaid expenditures exceed 3% annually, by making them pay for the annual increase. Municipalities that stay under 3% would get 25% of the savings, according to the booklet. Local governments in New York pick up a share of Medicaid spending.

A spokeswoman for New York City Mayor Bill de Blasio said the proposal effectively shifts Medicaid costs to localities.

“Whether it’s moms turning to our public hospitals for life-saving breast cancer screenings or first graders learning to read in our public schools, New Yorkers should not be held responsible for the State’s Medicaid gap,” said spokeswoman Freddi Goldstein. “We’ll review the details once we have them, but we’re ready to fight to protect New Yorkers.”

—With assistance from Henry Goldman (Bloomberg) in New York.

(Updated with additional reporting on tax provisions, comment from New York City mayor's office.)

To contact the reporters on this story: Keshia Clukey (Bloomberg Tax) in Albany, N.Y. at kclukey@bloomberglaw.com; John Herzfeld (Bloomberg Tax) in New York at jherzfeld@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington (Bloomberg Tax) at jharrington@bloombergtax.com; Kathy Larsen (Bloomberg Tax) at klarsen@bloombergtax.com; David Jolly (Bloomberg Tax) at djolly@bloombergtax.com

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