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Canadian Budget Officer Calculates Impact Of Legalizing Cannabis

by Mike Godfrey,, Washington

02 November 2016

Applying regular retail sales taxes to sales of legalized cannabis in Canada would raise only modest revenues, the Parliamentary Budget Officer has said.

In a new report, "Legalized Cannabis: Fiscal Considerations," the PBO said revenues would be "in the hundreds of millions of dollars, rather than the billions of dollars."

"The legalization of recreational cannabis will introduce an entirely new sector into the formal economy. Given the Government's intention to regulate and tax this new sector, legalization will create new government revenues and expenses. Legal sales of recreational cannabis may begin as early as January 2018," the report said. The PBO estimates that in 2018, 4.6m individuals aged 15 and over will use cannabis at least once. By 2021, this could rise to 5.2m.

The PBO found that, in 2015-16, the average price of illicit cannabis ranged between CAD8.32 (USD6.22) and CAD9.36 per gram, with a mid-point estimate of CAD8.84 per gram. It estimates the pre-tax price of legal cannabis at between CAD6.67 and CAD8.33 per gram, with a mid-point estimate of CAD7.50 per gram.

It cautioned that there may therefore be limited scope for the Government to apply a tax to legal sales without pushing the price significantly above the illegal market price.

"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," it concluded.

The PBO stressed that tax policy decisions "will involve trade-offs between two of the federal Government's goals: discouraging consumption among young Canadians and reducing profits in the illicit cannabis market." It suggested that while higher prices may discourage consumption, they could also provide a disincentive for current users to transfer to the legal market.

The PBO nevertheless argued that there will be greater scope to capture revenues as the legal market grows. It said: "Production costs for the legal industry are expected to decline, 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."

TAGS: individuals | tax | sales tax | public health | government committee | goods and services tax (GST) | excise duty | Canada | tax reform | retail | trade | services

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