How “Legalization” Cost Canadian Taxpayers

Commentary, Fergus Hodgson, Taxation

You might wonder how legislators could possibly lose money by legalizing and taxing an addictive substance. Behold, Canadian officials have outdone themselves with the rollout of recreational cannabis.

Both provinces and municipalities, many already in financial dire straits, have revealed a bevy of legalization costs. Meanwhile tax projections suggest relatively slim pickings, given the size of the cannabis market.

October 17 was a historic day for Canada, even if the practical aspects leave one scratching his head. As only the second nation to make an across-the-board liberalization, it meant a widely practiced activity would no longer be punishable, along with pardons for past minor infractions.

Once you get into the weeds, though, you find a spider’s web of conflicting regulations. Manitoba and Quebec, for example, are resisting the federal law and banning home cultivation, and edible forms of cannabis have another year to wait. Media advertising and event sponsorship also remain illegal for cannabis providers.

Quebec is even prohibiting items that were legal. That includes anything with the “name, logo, distinguishing guise, design, image or slogan that is directly associated with cannabis.”

Further, protectionism reigns and imports and exports remain illegal. In a shout-out to the dairy sector, only home-grown cannabis is good enough for Canadians!

The admission of legal use still places one at risk of being banned from the United States by border officials. Even if border states and provinces have legalized its recreational use, US federal law dictates that the border remains under strict prohibition.

Perhaps this confusion was to be expected, given reluctance from many provinces. The switch overnight from illegality to open sales in provincial stores—including online—smacks of hypocrisy and tax profiteering. Only Saskatchewan and Manitoba are leaving sales to private stores.

The Costs

The natural assumption with the end of prohibition is that enforcement costs will lessen. Not so fast. Anne McLellan of the legalization task force notes that, particularly at the outset, there will likely be increased enforcement.

The tight and numerous regulations associated with the now-legal industry will inevitably criminalize a whole new swath of people who do not realize their wrongdoing. Further, police will check more closely for cannabis intoxication among drivers.

The new framework will require drug-screening equipment and widespread training of law-enforcement officials, and the Federation of Canadian Municipalities fears higher medical expenses. The federation estimates total costs at $3–4.5 million annually for a population the size of Quebec City, with half a million residents.

In Red Deer on September 27, the Alberta Premier announced “funds up front” to defray the costs for municipalities. However, the $11.2 million province wide over two years, requiring an application and justification from cities, has failed to impress. The mayor of St. Albert explains that “The province is downloading the costs of legalization onto local communities while they pocket the cash that was intended to offset the costs.”

Revenue Goes Wanting

When the Canadian Prime Minister campaigned for legalization in 2015, the market price was $8.43 per gram, and now it stands at $7.43. This decline is consistent with cannabis’s already ubiquitous availability throughout Canada. In fact, consumption is so widespread that Statistics Canada estimate $5.7 billion worth in 2017, $1,200 per consumer.

Not only is there widespread consumption, corporations entering this space demonstrate impressive profit potential. Bloomberg News reports $79 billion as the market’s capitalization, including Canopy Growth alone at $13.1 billion.

Prior to legalization, the vast majority of consumption, more than four-fifths, came from the black market, rather than from approved medical sources. The success of informal sales casts a shadow over the viability of a legal but taxed and highly regulated alternative. Survey data attests to high price sensitivity and a reluctance to switch suppliers on account of legalization.

Comedians have pounced on the lack of incentive to switch. “Marijuana is a dangerous drug,” says Sonia of the Truther Girls, “unless the government is selling it.” The satirical Beaverton also summed it up well: “Our government will replace this straightforward [black-market] process with the reassuring convolution and bloated costs that Canadians are used to when trying to do anything adult or fun”.

Even a former federal health minister and head of the government’s pot task force says “nobody should be naive and think you can eliminate criminal activity from these areas entirely. That’s not going to happen.” She says that will have to be a factor when considering what the market will bear in terms of tax rates, which start with 10 percent imposed from the federal level (75 percent returned to provinces).

The C.D. Howe Institute estimates that the informal sector will continue to easily outweigh legal cannabis trade, and that federal and provincial taxes will collect $300–600 million per year. That is $10–20 per Canadian and, no matter how you slice it, a drop in the ocean of federal and provincial budgets.