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Legalized marijuana taxes must be set low to deter black market: study

WATCH: Trudeau government set to follow through on campaign promise to legalize marijuana

OTTAWA – A new analysis says governments can wrestle recreational pot proceeds away from criminals – just so long as they’re not counting on an early windfall from legalized weed.

The study, to be released Tuesday by the C.D. Howe Institute think tank, estimates legalized cannabis would generate about $675 million in 2018 in combined federal and provincial revenue through existing sales taxes.

However, if authorities want to raise even more cash in the early days of legalization through additional taxes, they risk undermining their stated priority of squeezing out organized crime, the report says.

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The study comes as the Trudeau government prepares to introduce legislation Thursday to begin the process of legalizing pot.

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“The government does actually have to choose at the outset between minimizing the black market and a large amount of revenue generation – it can’t do both,” study author Rosalie Wyonch said in an interview.

“However, if they do manage to nearly, fully legitimize the market, that’s when they can start to implement higher tax rates without necessarily re-entrenching the illicit market.”

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Using a $9-per-gram example, Wyonch estimates 90 per cent of Canada’s weed market would be legitimate if existing sales taxes were the only taxes applied.

But if governments seek to lift their total tax revenues on pot sales to around $1 billion, she said, illicit sales would likely grow to about half of Canada’s marijuana market.

Policy-makers could hit that threshold by tacking on as little as one loonie per gram, she added.

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Wyonch, a C.D. Howe policy analyst, said while the legal-pot revenues will be modest at first, there’s potential for more money to be made once the market matures and large companies streamline their operations.

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To produce her numbers, she said she used price estimates of illegal pot, by province, that were included in a report published last November by the parliamentary budget office.

That report found sales tax revenue on cannabis in 2018 could be as low as $356 million and as high as $959 million, with a likely take of about $618 million. The calculations were also based on legalized pot selling for $9 per gram – in line with current street prices.

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It also suggested that pricing legal pot too high would allow the black market to continue to flourish. If prices stay too low, it said, governments could be seen to be encouraging its use.

Other studies have predicted far bigger marijuana-fuelled windfalls for Ottawa.

CIBC World Markets has estimated federal and provincial taxes could be as much as $5 billion a year from legal pot, while Deloitte has projected as much as $22.6 billion in economic activity from recreational marijuana, including $5 billion to $8.7 billion per year in retail market sales.

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The Trudeau government has said that any eventual pot proceeds would be earmarked for addiction treatment, mental health support and education programs.

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The feds have also said their goals include keeping pot away from young people and the proceeds of its sale out of the hands of organized crime.

Last month, Finance Minister Bill Morneau said the government had yet to fully explore how much revenue it expects legal pot to generate.