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How will legal marijuana be taxed? The black market may play a role

Federal task force: Now is the time for marijuana legalization
Federal task force studying the issue says now is the time for marijuana legalization.

You’ll likely pay a tax on pot if you buy the legal stuff once Ottawa establishes the legalization framework, sometime next year. Exactly how much tax will be added at the till, however, remains uncertain.

In essence, determining the tax on weed will be a balancing act determined at least in part by the black market.

In its report released Tuesday, the federal task force studying marijuana legalization in Canada suggested imposing higher taxes on higher-potency strains.

READ MORE: Marijuana should be sold in separate stores with minimum age limit of 18, task force finds

An analysis from the Parliamentary Budget Officer, detailed in a report released last month, determined the pre-tax price tag on legal recreational pot will hover around $7.50 per gram. The same amount of the illegal stuff now sells on the black market for about $8.80.

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WATCH: The task force recommends that marijuana should be sold in separate stores, with a minimum age limit of 18

Marijuana should be sold in separate stores, with a minimum age limit of 18
Marijuana should be sold in separate stores, with a minimum age limit of 18

The small disparity — $1.30 a gram — between the two prices means there is little room to apply any taxes before the price of legal marijuana exceeds that of the black market product. And if the price of legal marijuana exceeds that of the illegal stuff, the PBO warned, consumers likely won’t see any motivation for patronizing the legal market.

READ: Why the government can’t charge more than $10 a gram for legal pot

The report estimated that about 600,000 more Canadians will start smoking weed, at least occasionally, once the recreational drug is legalized. With that, the budget officer calculated “modest” tax revenue of around $600 million in 2018, with most of that going toward provincial governments.

Ottawa could pull more in through an excise tax, but again, with an eye on beating black market prices.

Down the line though, once the legal market is established, Ottawa might find the room to hike taxes on weed.

READ MORE: Capitalizing on cannabis or profiting from potheads?

Legal production will reach economy of scale, which could cause prices of the wholesale product to decrease. That scenario would leave governments more room for higher taxes.

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Another eventuality is the emerging generation of pot consumers will be accustomed to a legal market – as well as the consistency, quality and “value-added” products like consumables – adding more room for more tax.

Cash-strapped provinces, grappling with debt and crumbling infrastructure, might be excited about the new revenue stream, but Prime Minister Justin Trudeau and his cabinet have been managing expectations.

READ MORE: Pot taxes won’t go into general revenue, Bill Blair says

Last year, Trudeau said his pledge to legalize marijuana was more about health and safety than about bringing in cash. Then in April, parliamentary secretary to the justice minister, Bill Blair, said any revenue from sales or excise taxes on marijuana will fund crime prevention and addiction treatment, prevention and education.

The $600 million in estimated taxes the government could bring in is in line with tax revenue from marijuana in Colorado, where a 2012 vote led to legalization in 2014. Adjusted for population and converted to Canadian dollars, Colorado pulls in about $650 million.

WATCH: The marijuana legalization task force recommends the government encourage smaller growers and a diverse, competitive marketplace alongside large, corporate cannabis growers.

How will marijuana legalization framework protect small growers?
How will marijuana legalization framework protect small growers?

In Washington state, where pot has also been legal since 2014, the state government imposes a 37-cent excise tax. There is also a nine per cent sales tax on marijuana. Overall revenue from sales of recreational pot between July 2014 and July 2016 was at about US$1 billion (C$1.3 billion), with the state collecting US$250 million (C$328 million) in taxes, according to a report in the Seattle Post-Intelligencer.

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That same month, the Denver Post reported its marijuana industry was worth about US$7.2 billion (C$9.4 billion).

A CIBC report published earlier this year valued the overall Canadian market at up to $10 billion.

— With files from Global News’ Patrick Cain and Robin Gill