There are few good estimates for how much a tax on cannabis would fetch the Government. Stuff commissioned the New Zealand Institute of Economic Research (NZIER) to come up with one. Principal economist at the institute Peter Wilson explains what they found.

ANALYSIS: Why do we believe that marijuana should be legal, but regulated? Because prohibition has been an expensive failure. It has allowed illegal groups to charge higher prices and there is no evidence that it has changed consumption.

Treasury has calculated that a change in legal status would raise an additional $150 million in revenue, as well as saving about $180 million in enforcement costs.

A number of states in the US have legalised and taxed marijuana used for recreational purposes, while a larger group have for legalised medical marijuana. Those states that have legalised recreational use have all done so via popular initiatives at the ballot box, often over the dead bodies of elected politicians.

A recent report estimated that taxes on marijuana will provide state governments in the US with US$745 million in revenue this year, made up of US$609 million in special taxes and another US$136m in general sales taxes.

To see what the figures might be here, we estimated what a special tax, plus GST, would raise in New Zealand.

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Because possession and use of marijuana are illegal, there are no official records kept on either levels of consumption or price. There are, however, several long-running surveys that allow us to make broad estimates of what level of revenue a tax might generate.

We have used the Ministry of Health's latest survey of drug use to arrive at an estimate of the number of users and how much they consume. Massey University publishes a regular series that reports the street price of marijuana.

We had to make several assumptions to make our calculations. The main one relates to rate of tax. We have assumed the same rate as applies in Colorado: 25 per cent of the pre-tax price with GST added on top.

REUTERS Recent report estimated taxes on marijuana will provide US states that legalised recreational use with US$745 million in revenue this year.

We then had to think about whether the current "black market" in marijuana would continue. Would people continue to deal with an (untaxed) illegal supplier or use a taxed and regulated source? This is a very difficult to calculate, since we have very little data to go by, but experience in the US indicates that legal sales are popular and this suggests that the benefits of being able to buy a product of uniform standard, that has been subject to quality checks and is legal is, in fact, valued, even if the price is somewhat higher. One feature that has been very popular with users is the requirement in Colorado for the strength of marijuana to be independently tested and displayed on package.

We also must take into account two factors that will affect the price paid in legal stores which will work to reduce the pre-tax price. Think of these as the effects of legalisation. For our purposes, these effects only apply to legal suppliers: the untaxed price that illegal dealers get will be unchanged.

The first is that legal suppliers will not be able to charge the premium that now goes to illegal suppliers: this will cause prices to fall for legal supply.

Second, because of its illegal nature, much marijuana is grown in small, uncommercial facilities. Again, based on US experience, legalisation will result in larger-scale, commercial production that will also result in reductions in costs.

Finally, we must estimate how much the various price changes and taxes will impact on the final selling price and how much this would change demand.

Putting all of this together, we believe that a 25 per cent excise on legal marijuana would raise about $40m in revenue, with a further $30 million coming from GST.

All up this gives a total of about $70m. This is a lot lower than Treasury's estimate.

We must stress the very tentative nature of these estimates. Predicting how much any new tax will raise is difficult. When the product is currently illegal and we must use data that is subject to significant potential errors, problems compound.

That said, we do believe that our estimates add to the debate. It gives us an idea of the size of the revenue that might be raised. $70 million isn't a lot within the context of the annual Government revenue of over $83 billion. But this is not a tax you would impose just for the revenue.

We continue to recommend that marijuana be legal, regulated and taxed.

Peter Wilson is a Principal Economist and Head of Auckland Business at the New Zealand Institute of Economic Research.