Should the Liberals follow that advice it means recreational pot sales, initially at least, will generate only modest sales tax revenues – about $618 million a year – and not the cash cow some predicted. What’s more, 60 per cent of that money will go to the provinces.
“We’re talking millions and millions, not billions and billions of dollars of revenue,” Parliamentary Budget Officer Jean-Denis Frechette said after releasing his office’s study on what Canada’s retail marijuana market might look like.
“The potential for revenue is very, very low,” added Mostafa Askari, he assistant PBO. “The illicit market, their profit margins are very high, so they have room to compete with the legal market, which makes it even more difficult for the government to set the price and the tax rate.
“If they want to achieve their objective of reducing the share of the illicit market, they always have to be conscious how the legal prices compare to the illegal prices.”
Liberal MP and former Toronto police chief Bill Blair, the government’s point man on legalization, said the government has never seen legalization as creating a cash cow.
“Absolutely not,” he said. “Our goals are to protect our kids, protect our communities by eliminating organized crime’s involvement and protect the health of Canadians.
“We recognize that in order to discourage its use among young people, but also to eliminate organized crime, price, quality and access are important considerations, and all of that is being worked on.”
The PBO says if the average legal price is lower than or equal to the current average national illicit price of $9 a gram, illicit market revenues can be squeezed to about $100 million. But if legal cannabis were priced at $15 a gr., illicit market revenues would to approach $4 billion.
“When the average legal price is less than or equal to the average illicit price, 98 per cent of consumption is projected to shift to the legal market in 2018,” it says.
Yet keeping the legal price competitively low would seem to rub against another core rationale for legalization: limiting and controlling people’s access to the drug and discouraging its use.
The report estimates 4.6 million Canadians 15 and older will use cannabis at least once in 2018. Most – 98 per cent – would come from the 41 per cent of users who use it at least once a week or daily. By 2021, the number of pot consumers is projected to rise to 5.2 million.
But imposing an additional excise or “sin” tax would cause a serious price imbalance between the legal and illegal markets, giving a significant advantage to organized crime groups.
A nine-member expert task force, led by Anne McLellan, a former Liberal minister, is to report to the government this month on how recreational marijuana should be produced, sold, consumed and otherwise regulated.
Legislation, due to be tabled in Parliament next spring , would end the 93-year criminal prohibition against simple possession of marijuana for non-medical, personal use.
The PBO report is intended to provide context for some of the legislative issues and its projections are based on legalization in January 2018.
Although Frechette and his officials said it was difficult to forecast behaviour in a market that does not yet exist, they peg total cannabis spending at $4.2 billion to $6.2 billion in 2018. Consumption and resulting tax revenues are expected to rise by 10 per cent to 13 per cent by 2021 as the legal market matures.
With production costs expected to drop over time, the government might find more wiggle room to impose higher taxes.
But there remain many unknowns. These include whether legalization will encourage people who don’t smoke (or eat) marijuana to start or, if occasional tokers, to increase their consumption and, therefore, tax revenues.
As well, if the government allows a “value-added” market to develop for, say, edible marijuana products, that could make it more difficult for the illicit market to compete, say PBO officials.
As the legal marijuana market matures, the PBO says the potential for governments to collect more revenue will grow. Production costs for the legal industry are expected to decline, it says, creating space for government to collect a portion of the cost savings without increasing the legal retail price.
“Further, a potential consumer shift to more value-added cannabis products could create a larger tax base. Finally, as the legal market becomes more entrenched, more Canadians may opt into the legal market, resulting in higher revenues.”
The Liberal government is expected to introduce its legalization legislation next spring. The PBO says its estimate of a January 2018 start for legal sales is based on discussions with industry stakeholders.
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