From: Ian Irvine
To: Concerned Canadians
Date: November 29, 2017
Re: Pot Taxes: Let’s Curb Our Enthusiasm
Tax revenues from a fully operational legalized marijuana market should amount to a fraction of one percent of Quebec’s total budgetary revenues, under optimistic assumptions.
Revenue projections require an estimate of market size. An excellent report by the Parliamentary Budget Office last year provides our best guess. It emphasizes that marijuana is widely available in Canada at present; it is of high quality and it’s cheap. Consequently, with marijuana legalized, the legal sector will have to attain the same standards as street dealers and grey-zone dispensaries at a similar product price. Otherwise the legal sector will remain secondary. The report estimates current consumption to be in the neighborhood of 650 metric tonnes, or 650 million grams. Following legalization that total may increase – perhaps by 10 to 15 percent. This number is for flower products only, so if we include oil-based products the total equivalent should be in the region of 800 tonnes in the near term and 900 tonnes in the longer term.
The current Quebec street price for marijuana when purchased in small quantities is in the $7 - $8 per gram range, and $5 - $6 when purchased in quantities of a half-ounce or ounce (28 grams).
A much-discussed tax rule is ‘a buck a gram’; that might keep the legal price not much higher than the illegal price. In practice this means that if retailers require a net of tax price of $6 then the average legal price would be $7 tax inclusive. This is also equivalent to approximately a 15 percent tax rate.
Given that Quebec houses about 25 percent of users, the near-term total consumption will be 25 percent of 800 million grams. But it will be impossible for the new corporation – the Societé québécoise du cannabis (SQC) - to meet demand immediately. While it has a goal of 150 retail outlets in the long term, it will have just 15 stores in operation by next July.
With a limited initial supply capability, perhaps only 25% of total use will come through legal channels; 25 percent of 200 million is 50 million grams, and a tax rate of $1 per gram yields $50 million in tax revenue.
If split 2:1 in favor of the province (roughly in line with the PST-GST split), that amounts to $4.25 per resident.
In the longer term, in a scenario where 900 million grams are consumed and the legal outlets account for, say, 70 percent of sales, then the same calculations yield a figure of $105 million, or $13 per resident.
Generating a substantial legal share of the market will be challenging, on account of retailing costs. Research from Colorado and Washington State indicates that bricks-and-mortar retailing accounts for as much as one-half of the total supply costs. And this is in a relatively low-wage environment – in contrast to a SAQ/SQC high-wage environment. The Quebec legislation allows for on-line sales, and retailing costs here may be lower.
Legalization will also lead to an increase in corporate and personal income tax revenues. So the excise or sales taxes estimated here forms a lower bound to the total revenue impact.
Taxpayers must be mindful of the fact that the principal goals of legalization are to decriminalize use and to supplant the black and grey markets with legal markets. The $105 million estimate I suggest amounts to just one-tenth of 1 percent of total provincial budgetary revenues.
Ian Irvine is a fellow at the C.D. Howe Institute and a professor of economics at Concordia University, Montreal.
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