How will marijuana be taxed? Legalization bill doesn’t say
We now know that adults wouldn’t be allowed to grow more than four cannabis plants per residence under the Liberals’ legal-pot regime. But we still know next to nothing about how the government intends to tax marijuana.
Will the stuff be subject simply to HST/GST or will there also be an excise tax, as is the case for tobacco and alcohol? Will the government try to keep taxes low in order to compete with and eventually elbow most drug dealers out of the market? Or will it treat marijuana as a cash cow and try to maximize revenue? And what share of that revenue will flow to provincial rather than federal coffers?
These are just some of the questions that remain unanswered even after the Liberal government tabled its marijuana legalization bill on Thursday.
It will be up to the Department of Finance to develop a framework for marijuana taxation, a Finance Canada spokesperson told Global News.
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Marijuana taxes will need to strike a fine balance, experts say
“I hope they don’t go for a high tax rate right off the bat,” Rosalie Wyonch, a policy analyst at the C.D. Howe Institute told Global News, speaking before the release of the bill.
Steep taxes on marijuana would push up its retail price, making it likely that many regular consumers of recreational pot would continue to buy from street dealers, Wyonch argued in an open letter to the federal government’s pot czar, Bill Blair.
In Colorado, which legalized recreational cannabis in 2014 and slapped a tax of almost 30 per cent on it, about half of the pot market initially remained underground, according to a November report by the Parliamentary Budget Officer. And about 80 per cent of the legal market was made up by demand for lower-taxed medical marijuana, suggesting that some recreational consumers were able to obtain medical prescriptions in order to access the cheaper legal cannabis.
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The case of Colorado also indicates that recreational consumers of marijuana, and especially those who use it daily, are very price-sensitive, said Wyonch.
If the government’s goal is to corner the black market, the retail price of pot will have to be reasonably close to the street price, even though some users will be willing to pay a premium for legal cannabis, according to Wyonch.
On the other hand, very low taxes “will generate little revenue and consumption of marijuana may increase due to low prices and a newly accessible legal supply,” she noted in the letter.
A high price difference between pot for fun and pot for medical use could also push Canadian recreational users into trying to obtain medical prescriptions under false pretenses, Wyonch said.
She estimates that applying only GST/HST will result in shrinking the black market for pot to less than 10 per cent of the overall market. That will yield about $675 million in annual revenue, she calculates. Raising taxes to achieve $1 billion in revenue would mean accepting that 50 per cent of the market, or over 300 metric tons of marijuana, would remain in the hands of drug dealers, Wyonch wrote.
According to PBO projections, the retail price of marijuana would be around $8.4 per gram if the government charged only GST/HST. That would be just below the going price on the street, which the PBO estimates at $8.8 per gram.
Excise taxes like the ones Canadians pay on wine and cigarettes would likely push the legal price of pot above the illicit prices, according to the PBO.
Tax revenue of between $675 million and $1 billion a year in taxes doesn’t seem like much, especially when split between Ottawa and provincial and territorial governments.
But there may be room to increase taxes at a later stage, when the legal market has established itself, noted Wyonch. Canadians may get accustomed to buying cannabis legally and become less willing to purchase it on the black market, even if it costs less.
And the sales taxes aren’t the only way in which legal marijuana would contribute to government revenue, CIBC economist Avery Shenfeld told Global News.
Shenfeld, which estimated legalized pot could bring in up to $5 billion in revenue, said his calculations included sales taxes as well as income taxes — paid by anyone working in the industry, from growers through truck drivers to retailers — and corporate taxes.
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