HARTFORD — Connecticut’s cannabis industry, competing against Rhode Island and Massachusetts dispensaries that offer sharply lower prices, wants state lawmakers to let them claim tax deductions for expenses, like any other business.
But because the federal government still lists cannabis as a Schedule I drug — classifying it with heroin, cocaine and hallucinogens — Connecticut’s 10-year-old medical marijuana industry and the three-month-old recreational-use retail industry cannot seek the deductions that the industry estimates total about 25 percent of gross sales.
The result is higher costs for medical patients and recreational-use consumers as the young retail industry needs fostering and the social equity program aimed at helping create jobs in communities that suffered disproportionately in the failed war on drugs is barely getting started.
Tiana Hercules, a member of the city council in Hartford who recently won a provisional cannabis cultivation license through the state’s Social Equity Council, said Friday that the federal tax rule is a holdover from the age of prohibition.
“We’re being penalized as if we were not legitimate businesses,” Hercules said. “As a person in the social equity program, we are supposed to be developing business acumen and hopefully make a living and build some generational wealth as well. We should be able to reinvest in the business, staff and innovation as well. It makes a lot of sense if Connecticut wants a competitive and thriving cannabis industry. We’re ready to create a lot of excitement.”
Legislation awaiting action in the General Assembly’s Finance, Revenue & Bonding Committee is estimated to save the industry $4.7 million in the state budget year that starts July 1; $6.2 million in the year after; and $9.6 million in the year ending June 30, 2026. Estimates target gross sales growing sharply, reaching $650 million a year by July 2026.
While it would be a relatively small amount of savings on equipment, personnel and inventory expenses, industry advocates say even narrow margins would help the new recreational retail sales landscape to the point where lower prices would result, increasing sales and tax revenue for the state while making the industry more competitive with surrounding states and gaining an advantage on the legacy cannabis underground.
Last year, Massachusetts and New York adopted similar tax breaks in a term called decoupling from the federal tax formula. Currently, 19 states have adopted some form of decoupling, including Maine, Vermont, California and Oregon. Similar legislation is awaiting the governor’s signature in New Jersey. So far, only a handful of recreational-use cannabis dispensaries have opened in New York, most of them in Manhattan.
Bryan Murray, vice president of Acreage Holdings, a multi-state company that has dispensaries in Danbury, Montville and South Windsor, said any tax breaks mean that Connecticut companies will have better chances to succeed against out-of-state dispensaries, such as those over the border in southwestern Massachusetts and Rhode Island, as well as illicit Connecticut sellers that dominated the state’s underground recreational market for decades before the 2021 law legalizing recreational use.
“I think what we oftentimes overlook in this conversation is that Connecticut is competing against a thriving illicit and underground market,” Murray said in a phone interview on Friday. “Allowing the same tax deductions and normalizing the industry helps create a runway and environment to bring individuals into the legal market and drive down our costs.”
Murray cited industry research indicating that when the price of cannabis exceeds 15 percent of the illicit market, consumers revert to the underground. “People are willing to pay more for products they know are safe and regulated,” he said. But when the price differential gets higher, they are also able to travel across state lines. “We want to create an environment that encourages people to come to Connecticut.”
Murray said that the few million dollars involved amounts to “not even a rounding error,” in Gov. Ned Lamont’s pending two-year, $46 billion budget and that California gained more revenue in sales than it lost in tax revenue as retail prices fell and more consumers left the illicit market after that state decoupled the operating expenses.
A 2022 industry analysis of the issue indicates that if expenses were allowed to be claimed on tax returns, Connecticut could collect an extra $66 million in direct taxes on cannabis sales over the next five years.
During a public hearing on the issue earlier in the legislative session, House Majority Leader Jason Rojas, D-East Hartford, a proponent of the recreational-use retail legislation of 2021, asked the committee to support the tax breaks because the young industry needs some relief to foster a stable adult-use marketplace. A former chairman of the tax-writing Finance Committee, Rojas said in a Friday phone interview that the issue will likely fit into the overall negotiations over the biennial budget to take effect July 1.
“It’s going to be part of the larger discussion on revenue and whether we can approach this differently because it is a revenue loss and there are a lot of priorities,” Rojas said. “But it’s a burgeoning marketplace and we’re seeing what the other states are doing. It’s consumer friendly. My hope is there will be room in the budget for it.” He said that Massachusetts’ lower prices could be the result of a more mature marketplace, since it was legalized for adult use in late 2018. “Hopefully when more competition comes, we’ll see retail prices drop.”
In particular, new businesses under the recreational-use cannabis Social Equity Council would benefit, where even small margins could be the difference between success and failure.
“Every other business in the state is allowed to deduct overhead, equipment, labor,” said Adam Wood, president of the Connecticut Cannabis Chamber of Commerce. “Our argument is that allowing for these state tax deductions will actually drive down the price because net operating costs would not be as high. When pricing is reasonable or under control, the regulated market grows, and sales taxes from these businesses will increase.”
Other supporters of the legislation include the Connecticut Society of Certified Public Accountants and the Connecticut Medical Cannabis Council, whose members include the state’s four marijuana growers for medical and recreational use.
“This will benefit all such businesses, but will be of particular help to smaller entities such as the social equity licensees and other start-ups in the new adult-use cannabis program,” the Cannabis Council said in written testimony to the finance committee. “The tax savings will help on cash flow and enable businesses to reinvest in their operations to be more competitive in the marketplace.”
The legislative finance committee will begin voting on budget items next week as the Democratic-dominated General Assembly crafts a tax-and-spending package that will become the center of negotiations with the governor as the June 7 adjournment date gets closer.
kdixon@ctpost.com Twitter: @KenDixonCT
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