Ottawa – Canada will have little wiggle room to tax recreational marijuana sales when it moves to legalize the psychoactive drug, a report to parliament said Tuesday.
One of the principal rationales cited by supporters for ending the prohibition on pot has been the bounty of tax revenues legalization would bring.
But parliamentary budget officer Jean-Denis Frechette, tasked with providing independent analysis to lawmakers, warned it would not be a bonanza.
Retail sales taxes are expected to be relatively modest at the start – about Can$300 million to Can$600 million (US$224 million to US$448 million) and not billions, he said.
That is far below the annual future cannabis tax revenue of up to Can$5 billion estimated by CIBC World Markets in January.
Also, tax policy decisions will require trade-offs between the government’s two main objectives: discouraging consumption among Canadian youths and reducing the profits in the illicit cannabis market.
"When legalization occurs, the government may have little fiscal space to apply tax without pushing the price of legal cannabis significantly above the illegal market price," Frechette said.
In his report, he explains that higher cannabis prices discourage consumption, especially among young Canadians who are likely to be more sensitive to price.
But higher legal cannabis prices provide a disincentive for current users to transfer to the legal market.
According to the report, the average price of illicit cannabis this year ranged between Can$8.32 and Can$9.36 per gram. The pre-tax price of legal cannabis is projected at between Can$6.67 and Can$8.33.
"Even with only a sales tax, legal cannabis prices in 2018 will likely be as high as illicit market prices in 2015-16. Excise taxes will likely push the legal price above the illicit price observed in 2015-16," Frechette concluded.
Canada will become only the second country to fully legalize recreational cannabis, after Uruguay, with legalization seen next year or in early 2018.
A task force is scheduled to provide recommendations to the government this month on regulating and taxing marijuana sales.
According to government statistics, as many as 4.6 million Canadians aged 15 and over will consume an estimated total 655 metric tons of cannabis annually by 2018, spending an estimated Can$4.2 billion to Can$6.2 billion each year.
Looking at the experience of Colorado, Frechette said when the US state legalized recreational marijuana in 2014, the tax rate was set at nearly 30 percent.
As a result, about half of consumption remained in the illicit market while 40 percent used lower-taxed medical marijuana. Only 5-10 percent purchased fully-taxed, legal recreational pot.
Medical marijuana in Canada is taxed but may be deducted from income taxes as an allowable expense.
As the recreational market matures, the report notes, production costs are expected to decline and more people may opt into the legal market, increasing taxable revenues.