One argument often made for legalising recreational cannabis is that governments who make the leap can expect a tax windfall.

However, the authors of a new paper published in Canadian Public Policy argue that legal cannabis can in fact have a negative effect on the sale of other controlled substances that are far more lucrative sources of government revenue than pot.

Ian Irvine, professor of economics in the Faculty of Arts and Science at Concordia University Montreal, said: “The tax margin on cannabis is quite small compared to the margins on alcohol and tobacco.”

Dr Ian Irvine
Professor of economics in the Faculty of Arts and Science at Concordia University Montreal Ian Irvine: “The tax margin on cannabis is quite small compared to the margins on alcohol and tobacco.”

Current cannabis tax rates in Canada are being kept deliberately low – about $1 per gram, with $0.75 going to the provinces – in order to cut into the share of the illegal market. Provinces can and do add their own taxes.

“There is an unintended consequence to that,” said Irvine, who co-wrote the paper with the University of Colorado’s Miles Light. 

“You can’t have a huge legal market and have huge legal tax revenues, because that would require a high rate of taxation on each unit of cannabis.”

In the model they created for the paper, Irvine and Light consider legal and illegal cannabis as two distinct products and use econometrics to assess their overall impact on revenues. They assume a future where legal cannabis accounts for about 70% of the total weed market, while 30% remains black market – more or less the state of the Canadian market in 2020.

While their model did suggest that tax revenues from cannabis sales would not match the concurrent drop in revenues from alcohol and tobacco sales, it also predicted an increase in revenue from the personal and corporate income taxes paid by industry workers and firms. This supposes that there will be a decrease in the number of people working in the non-tax-paying illegal sector and a rise in the number of people in the taxable legal market, and the eventual profitability (and tax revenue generating) of legal cannabis industry firms.

Finally, the model placed a dollar value on legalisation and found that users would pay a C$500 premium per year to have access to legal weed.

Irvine compared the current systems operating in Canada unfavourably to those in US states like Colorado that encourage widespread, if heavily regulated, retail operations.

“As an economist, I have some sympathy for the way a regulated market can serve the public but I certainly think there are better economic models out there than the one we have in Quebec,” he said.

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