Pubdate: Thu, 05 Oct 2017
Source: Globe and Mail (Canada)
Copyright: 2017 The Globe and Mail Company
Authors: Rosalie Wyonch and Anindya Sen
Page: 9


Prime Minister Justin Trudeau has proposed a 10-per-cent federal tax
on sales of marijuana with 50-50 revenue-sharing with the provinces.
Although the proposal was a surprise to provincial leaders, for some
time, the federal government has articulated that it is seeking a
collaborative approach.

The Prime Minister's proposal features a perfectly reasonable tax rate
and revenue-sharing arrangement for recreational marijuana. Our
analysis shows that a 10-percent tax results in $400-million to $450
million in combined tax revenues and more than 90 per cent of the
recreational market being regulated, assuming prices for legal
marijuana stay similar to their current level of $7.50 a gram. Higher
taxes will not generate increased revenues and will only encourage
consumers to switch to illegal supply. Further, harmonized tax rates
mean that prices will likely be similar across provinces. This would
further minimize the black market, as there would be no profit to be
made moving marijuana across provincial borders from a low-tax
jurisdiction to a high-tax one.

Mr. Trudeau's proposal should be applauded, if it were to be the only
tax on the retail sale of marijuana.

Unfortunately, a number of provincial leaders reportedly objected to
splitting tax revenues with Ottawa. Provincial leaders have maintained
that the costs associated with public awareness, setting up retail and
distribution systems and continuing enforcement of laws and
regulations will fall predominantly on provincial balance sheets and
that they should be entitled to a larger piece of the revenue pie.
While some costs will fall more heavily on the provinces, the federal
government faces significant costs associated with licensing and
inspecting producers. Mayors from Toronto to Saskatoon have also
expressed their desire to get a slice, with some wanting additional
levies to fund municipal issues related to legalization.

While all levels of government will certainly face costs as
recreational marijuana goes on sale, there is a danger that the
division of tax revenue may overshadow the policy priorities that led
to legalizing recreational marijuana in the first place. The
protection of public health and the minimization of the black market
(and its associated criminal activity) are the main objectives of

Of paramount importance is that all levels of government not forget
the key to achieving the main policy objectives is the total price of
recreational marijuana. If the pretax price of marijuana were $10 a
gram, as targeted in Ontario, a 10-per-cent tax rate would result in
$300-million in total tax revenue, but with only half of the market
being regulated. If the government imposes GST/HST/PST in addition to
the proposed 10-per-cent federal tax, the picture gets even more
bleak. Combined revenues would be about $450-million, but only about
40 per cent of the market would be regulated. Put another way, the
black market would represent about $3-billion to $3.5-billion of
annual recreational consumption.

Further, taxes on retail sales are not the only way that recreational
marijuana can contribute to government coffers. Governments may
receive licensing revenues if they choose to allow private
establishments to retail marijuana, or they may simply create a
government monopoly where all profit from retail goes directly to the
government (though there are other competitiveness and cost issues
associated with crown-corporation retail, the model to be used in
Ontario and New Brunswick). There should also be consideration for the
additional revenues from income taxes, property taxes and corporate
taxes that could be realized by bringing this multi-billion-dollar
industry out from the underground economy. It is true that no one can
be sure what the costs of legalization will be, but the peripheral
revenue effects are equally uncertain.

Instead of fighting over tax revenues on a product that has minimal
fiscal room for taxation, provincial governments should focus on
developing retail and distribution systems that will effectively
compete with the black market. This should be the primary objective at
the outset of legalization and will serve to minimize provincial costs
while maximizing the knock-on economic benefits related to the
industry as a whole. Provincial leaders should seriously consider the
Prime Minister's proposal and not lose sight of the long-term
objectives in a short-sighted attempt to boost budgetary bottom lines.

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Rosalie Wyonch is a policy analyst at the C.D. Howe Institute. Anindya 
Sen is the director of the Masters of Public Service program and a 
professor of economics at the University of Waterloo.
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