Pubdate: Sat, 26 Nov 2016
Source: Packet & Times (CN ON)
Copyright: 2016 Orillia Packet and Times
Author: Ian Irvine
Page: A4


Several economic myths have surrounded legalization of marijuana. This
has maintained the illusion it would be a bonanza for federal and
provincial treasuries because of the supposed enormous tax revenues
that legalization would generate.

The Parliamentary Budget Office in Ottawa is to be congratulated for
blowing up some of these myths in its report, published this month, on
projected pot tax revenues following legalization in Canada in 2017 or

The first myth is legalization would "create" a market value of more
than $20 billion. This number was offered in a recent Deloitte Canada
report, taking into account investment.

In consumption terms, relatively little will be "created." An illegal
market may transform itself into a legal market, with only a small
increment in total consumption. Legalization will bring about a
displacement of production from private smaller-scale growers to
licensed industrial-scale growers.

This may turn out to be market enhancing because of labelling
requirements, and a greater certainty regarding pharmaceutical
content. It will also lead to employment of PhD graduates in
chemistry, students with MBAs, lawyers and marketing specialists. Some
security jobs will migrate from enforcers to Garda employees. But if
the legal market is to supplant the illegal market, it will also
create unemployment among the existing growers and

Indeed, rents that accrue will be spread differently - away from small
operators and organized crime and toward individuals whose retirement
portfolios hold MJ stocks.

The published report from the PBO finds total tax revenues from
legalized marijuana would come to only about $600 million, with large
confidence boundaries around this central number.

In contrast, some private-sector commentators have been projecting tax
revenues in the billions. The key element in the PBO analysis is its
recognition buyers are price sensitive - a big price premium for the
legal product could lead users to stick with their existing dealer.

This assumption is based on a careful scrutiny of existing economic
research. The Canadian illegal market is well developed: Product
quality is high and readily available. The PBO simulates projected
revenues on the basis of many price differentials. It concludes if the
legal market price is only a dollar or two higher than the illegal
price, most buyers will migrate to the legal market. But a larger
price differential would lead to a low legal market share and lower
tax revenues.

Experience from two U.S. states highlights the importance of price. In
Washington state, the initial tax was almost 100 per cent. As a
result, shop prices were $28 per gram, compared to $9 on the street.
Unsurprisingly, only 18 per cent of sales went through licensed
vendors. In contrast, Colorado applied a rate of about 35 per cent.
The shop price was $15 per gram, and about 65 per cent of the
estimated market migrated to licensed sellers. Shop prices are slowly
declining further, and the share of black market activity is now
minimal. Almost all illicit cultivation is bound for out-of-state
markets, where the street price is higher.

Notwithstanding the many challenges facing the legalization process,
the PBO has gotten this process off to an excellent start, with its
sober assessment, professional statistical modelling and avoidance of
exuberance. The government should use this assessment to craft a law
that takes its conclusions into account and avoids the pitfalls
experienced in Washington State, and not fall for the illusion that
billions of dollars will suddenly fall in its lap.

Ian Irvine is an economics professor at Concordia University and an 
associate researcher with the Montreal Economic Institute.
- ---
MAP posted-by: Matt