Levying higher taxes is likely to push people into buying from a black market, according to the study | Shutterstock



The federal and provincial governments should only expect a total of between $400 million and $450 million in tax revenue from legalized recreational marijuana, according to a new C.D. Howe Institute study.

That is far less than the $5 billion annually that a 2016 report from CIBC World Markets estimated tax revenue from legalized marijuana to be.

Despite some claims that the legal marijuana market could exceed $20 million, applying results from Colorado to Canada yields an estimate of roughly 637 to 763 tonnes, which is in line with Parliamentary Budget Office (PBO) estimates of a market size of about 655 tonnes,” the C.D. Howe study said.

“Employing a per-gram price range of $7.50 to $8.50 (consistent with PBO estimates) implies a $4.7 billion to $6.5 billion retail market, including both legal and illegal suppliers.”

The study recommended against high taxes because instead of fueling increased revenue, high taxes would only encourage consumers to switch to illegal supply sources.

“We estimate that if the pre-tax price of marijuana remains at or below its current level of $7.50 per gram, a 10% GST [Goods and Services Tax] or HST [Harmonized Sales Tax] results in more than 90% of the market being legitimate,” noted the study.

“On the other hand, if the pre-tax price were to rise to even $10 a gram, less than half of the market would be regulated.”

The study crunched numbers to find that the optimum pre-tax price for legal marijuana is between $7 and $9.50 per gram and that this assumed the equivalent of a 5% provincial and a 5% federal tax.

“Provincial taxes should be uniform across jurisdictions in order to ensure further minimization of black markets,” the study said.

(Graphic: The more tax that federal and provincial governments aim to extract from a future legal marijuana retail industry, the more sales will be pushed into the black market | C.D. Howe Institute)

The two people who contributed to the study were Anindya Sen, who is the director of the masters of public service program and a professor of economics at the University of Waterloo; and Rosalie Wyonch, who is a policy analyst at the C.D. Howe Institute.

gkorstrom@biv.com



@GlenKorstrom

