Pubdate: Sat, 24 Jun 2017
Source: Globe and Mail (Canada)
Copyright: 2017 The Globe and Mail Company
Author: Barrie McKenna
Page: B4


Donald Trump bumbled into the debate over repealing Obamacare,
insisting that "nobody knew" health care was so complicated.

Justin Trudeau may be thinking the same about his plan to legalize
recreational marijuana.

Converting a $7-billion-a-year black market into a
government-regulated industry is proving to be, well,

One of the thorniest problems will be deciphering the economics of
taxing marijuana.

Federal Finance Minister Bill Morneau and his provincial counterparts
agreed this week on the principle of keeping taxes low and
co-ordinating related policies. But virtually all the key details
remain unresolved as the clock ticks down to planned legalization a
year from now.

At first blush, it all seems pretty simple. Ottawa and the provinces
already pocket billions of dollars a year by heavily taxing tobacco
and alcohol. It's easy money - and readily justifiable on public
policy grounds because higher prices discourage drinking and smoking.
So why not just slap a hefty excise tax on cannabis, apply the usual
federal and provincial sales taxes and watch the cash pour in?

That's what Colorado did, with mixed results. The state, which
legalized recreational cannabis sales in 2014, quickly learned that
marijuana smokers, who to tend to be younger, are price-sensitive.
Users gravitated to cheaper options. The state put a combined
30-per-cent tax on marijuana, but managed to steer less than 10 per
cent of consumption into the legal market. Consumers continued to buy
roughly half or more of their marijuana on the black market, and there
was a surge in people getting prescriptions for medicinal marijuana,
taxed at a lower 11-per-cent rate.

A significant portion of the retail market is bound to remain illicit
- - no matter the price - because younger teens won't be allowed to buy
the product legally. Ottawa is recommending a minimum age of 18 to
purchase, but that's largely up to the provinces and, if they choose a
higher threshold, they risk encouraging the black market.

Indeed, years of efforts to combat smuggling and production of illicit
tobacco products has failed to completely stamp out the black market
in Canada. Anywhere from 15 per cent to 33 per cent of cigarettes sold
in Ontario and Quebec are illegal, fed by a network of contraband factories.

The lesson for Ottawa and the provinces is that they need to be
mindful of the price gap between legal and illegal sales. The higher
the gap, the less successful the government will be at shutting down
the illegal market and forcing criminals out of business.

Research by the Parliamentary Budget Officer has estimated that if the
after-tax price of cannabis was $10 a gram and the illegal price was
$9, more than a third of sales would stay on the street. Raise the
price spread to $5 a gram, and roughly two-thirds of the market would
remain underground.

Taxing marijuana according to its concentration of
tetrahydrocannabinol - the chemical in marijuana that creates the buzz
- - could prove more technically challenging, Mr. Morneau said.

On the other hand, tax all marijuana at the same rate - regardless of
potency - and consumers would buy more and stronger stuff, such as the
infamous BC Bud. And that would counter the public-policy objective of
discouraging people from getting impaired.

Also unclear is how an excise tax on edible marijuana would

A 2016 federal task force that looked at legalization acknowledged it
won't be easy orchestrating a perfect price point that will discourage
consumption and raise revenue, without driving illegal sales. The
panel urged Ottawa to create a "flexible system than can adapt tax and
price approaches to changes in the marketplace."

Ottawa and the provinces could be facing years of micromanaging to get
the balance right.
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