Colby Cosh: The Highs and Lows of Taxing Legal Cannabis

Article by Colby Cosh, SaltWire

Colby Cosh: The highs and lows of taxing legal pot Premium content Colby Cosh

The new number of the journal Canadian Public Policy contains a paper entitled “ The tax consequences of legal cannabis. ” Great, I hear you asking: what are those? About time someone asked! Slow down, bud: economics tends to be a factory for giant wads of differential equations, and not so much in the business of simple answers that would fit in a fortune cookie.

But the paper, which is the work of Concordia’s Ian Irvine and Miles Light of the University of Colorado at Boulder, is important despite having an exploratory character. What the pair did was to build a “demand model,” a toy economy with legal cannabis suddenly injected into it, and try to find realistic estimates of the various inputs to the model.

These inputs are quantitative answers to such questions as “If people are buying more cannabis, what happens to alcohol sales?” or “If people spend x dollars on legal cannabis, how much of that spending does the government capture in corporate taxes?” Efforts have been made to measure some of these parameters, and at many of the points at which their model requires one, they provide the reader with a range of realistic values.

If people are buying more cannabis, what happens to alcohol sales?

This means that, no, they don’t have a straightforward answer to the question implied in their title. But they do offer compelling guesses, and their real goal was to help establish foundations for tackling the question. Canada is far ahead of the rest of the world on cannabis legalization. If hundreds of other states and jurisdictions are going to follow us down that road, now is not too late to start thinking through those tax consequences.

But they don’t amount to as much you might think. The key question that the Irvine-Light model raises is whether the legalization of cannabis cuts into a government’s revenue from the sale of other “recreational goods,” the important ones being liquor and tobacco. The increase in overall consumption of cannabis resulting from legalization is likely to be relatively small: as they observe in their concluding discussion, “High-dose users account for three-quarters of all [locoweed] consumption, and those users were well provisioned by the illegal market before October 2018.” But in a country like Canada that imposes excruciating taxes on smokes and booze, the “cross-elasticities” between pot and the other recreational goods become very important.

And, in fact, Canada probably comes out behind. The most serious research on cross-elasticities comes from Washington state, where legalization supposedly led to a 20 per cent decline in tobacco sales and a 12 per cent drop in booze. Less dramatic cross-elasticity effects would still be a big blow to treasuries. Almost any plausible numbers make cannabis legalization a net loser for a country or province that makes heavy use of sin taxes. (Some don’t, and those places have less to worry about from substitution away from cigs and liquor.)

The good news is that the state makes up most or all of the loss on personal and corporate income taxes. Legalization ultimately moves labour, Irvine and Light note, “from a tax-evading sector to a tax-generating sector.” In the Canadian case, governments might come out behind on the order of a billion dollars a year when it comes to taxes from recreational goods. But taxes on the labour of cannabis retail workers and growers are new money with no offsetting loss to speak of. The state wasn’t capturing any of that flow before.

With plausible parameter values, the loss from booze and smokes is more or less made up by income and corporate taxes, with the former being far more important. That’s not factoring in any kind of downstream benefit to the state created by the replacement of drinking and tobacco use (or, for that matter, other illegal drugs, which appear in the analysis only tacitly). Moreover, the authors add, the parameters used to estimate “tax consequences” can also be used to guess at the consumer surplus — the money equivalent of the welfare gains enjoyed by pot smokers — from the existence of legal pot.

Read the full article here.

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