Large black market, supply shortage, expected to slash tax revenues from legal cannabis

A large black market combined with supply shortages of legal marijuana will cut potential tax revenues by an estimated $800 million in the first year of legalization, according to a new report from the C.D. Howe Institute.

Cannabis Countdown: Estimating the Size of Illegal Markets and Lost Tax Revenue Post-Legalization authors Anindya Sen and Rosalie Wyonch say that government revenue forgone to black market activity will likely exceed the amount federal and provincial governments collect, only between $300-600 million.

The federal government made it clear that a key objective of legalization is the elimination of black markets and their associated criminal activities. Accordingly, federal and provincial governments have agreed to keep marijuana taxes relatively low to keep legal marijuana prices competitive.

“However, regardless of any significant legal-illegal price differential, a black market will clearly thrive if legal domestic supply is not able to meet demand,” said Sen.

The report estimates the size of the marijuana black market during the first year of legalization will likely be about 380 tonnes, or at least $2.5 billion. The authors capture total demand and supply by not only using data on dried flowers, but also by including edibles and edible oils and converting them into dried marijuana equivalents.

Their results also indicate that, at current production levels, legal supply will meet roughly only 30 to 60 per cent of total demand. The loss of tax revenue as a result is quite large. If the entire marijuana market were supplied legally and taxed, the potential revenue from both excise and goods and services taxes would be about $1.3 billion.

The report recommends provinces ensure regulations that facilitate a competitive and convenient legal retail market. The federal government should focus on ensuring it does not impede production more than is necessary to protect public health so there will be enough legal marijuana to supply those retail outlets. In addition, the federal government and Health Canada should develop regulations for edible and concentrated marijuana products. The products are already available on the black market, providing a significant competitive advantage since they will not be part of the legal regime, at least at first.

Wesley Gibbs photo

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