Pot not the cash crop its supporters claim

by JORDAN BATEMAN
BC Director, Canadian Taxpayers Federation

Fourteen years ago, B.C. Marijuana Party candidate Joshua McKenzie ran in the staunchly conservative provincial riding of Fort Langley-Aldergrove. He spent a memorable all-candidates meeting answering every question with one sentence: “If government legalized and taxed marijuana, there would be plenty of money for health care, education and other priorities.” By the end of the meeting, people were chanting his answer along with him.
McKenzie only drew 674 votes, but the belief that legalizing and taxing marijuana could pay for everything has only grown since 2001. The examples south of the border, however, seem to suggest that the truth is very different.

With Prime Minister Justin Trudeau’s campaign promise to “design a new system of strict marijuana sales and distribution, with appropriate federal and provincial excise taxes applied,” Canada is closer than ever before to seeing what kind of tax money can be wrung out of the pot industry. And while the Canadian Taxpayers Federation does not oppose legalizing marijuana, it certainly isn’t a government cash crop.

A 2012 study estimated national marijuana sales at $4.6 billion per year. That’s total revenue, notpotential taxes. Indeed, the taxes generated from marijuana are likely to be far less than suggested in recent years. If you’re hoping that pot will fund a new school in every community or a subway to your door, it won’t.

In Colorado, the first U.S. state to legalize pot, tax revenue from marijuana is on pace to hit $126 million this year on $923 million worth of sales. If Canada used a similar tax rate, it would generate $628 million in taxes per year. That might sound like a lot of money, but considering the federal government is projecting to collect $290 billion in revenue this year, the additional cash from marijuana would amount to an increase of 0.22 per cent.

“The big lesson we tell other states is you probably shouldn’t legalize marijuana if you want to make money — that’s not why you do it,” a Colorado official told the Huffington Post.

In Washington state, the revenue generated from taxes is even less, $65 million over the first 10 months of this year. “When you’re looking for billions of dollars, tens of millions doesn’t solve the problem but it certainly doesn’t hurt,” explained an staffer in Washington Governor Jay Inslee’s office.

Marijuana legalization advocates often argue that enforcement costs will dip, too. However, that isn’t the case thus far in Colorado, as police there have asked for more resources to try to stamp out the organized crime networks that controlled marijuana production and sales for decades. Further, the black market is still in operation as people seek cheaper, tax-free marijuana.

And that’s the real Catch-22. How do you regulate and tax marijuana when the black market can provide it so much cheaper? If you push marijuana taxes to tobacco levels, will you keep people buying contraband? Would a critical mass of people pay a premium for pot when they can get it the old fashioned way at much lower prices?

There’s still an illegal market for cigarettes in Canada — 15 to 33 per cent of smokes are contraband, and many fall into underage hands. “Kids have less money and they are amazing communicators on social media,” an industry expert explained to the Victoria Times Colonist. “As soon as one finds out where you can get tobacco for half price or less, everybody knows.” Marijuana is — and would remain — the same, unless the price of the legal product was lower than the black market price, which would only happen if the government decided to forgo some of its potential tax revenue.

Given the difference in usage patterns, and the precedents of Washington and Colorado, it seems highly unlikely that marijuana taxes will generate nearly as much revenue as tobacco taxes.

Marijuana legalization is coming, thanks to Prime Minister Trudeau. It will be a fascinating experiment in public safety and taxation policy, one that will be studied for decades to come. But no politician should start writing cheques until they see how many zeros marijuana taxes actually produce.