Article by Matthew Trudeau, Lift News
This is the conclusion of a two-part series exploring the problems around taxing cannabis in Canada. Part one can be found here.
Why Tax Rates Are Important
Being one of the ‘sin taxes’ means setting ideal marijuana tax rates that are fair to the marketplace and would preferably allow for moderate industry growth, without encouraging widespread abuse. As well, taxes that are too high will encourage further development of the black market to undercut government mandated pricing. Black market production of marijuana is a potential threat as there is a wealth of knowledge and space available when it comes to growing, production timelines are moderately fast providing a quick return on investment, and marijuana is relatively straightforward to produce compared to alcohol, tobacco, and illicit drugs.
Furthermore, high taxes will also prevent consumers from making purchases and this will cause tax revenue and the industry to stagnate. Given the fact that there is no, as yet, explicit measure of the possible increased health care costs—like there are with tobacco and alcohol—the government shouldn’t want to tax the industry into oblivion. For legislators right now, the economic gains will supersede the costs.
On the other hand, tax rates that are too low could lead to a higher prevalence of use and the Liberal government has been very clear in its desire to focus on harm reduction. Beyond this, low tax rates can encourage export or illicit diversion to foreign markets. If potential profit margins for export are significant, Canada could become an illegal source of smuggled marijuana—similar to alcohol during American prohibition. Any government would like to avoid this.
The ideal tax point for the government is the number at which there is a good amount of tax revenue generated without straying far from their harm reduction goals. Legislators are always keen to line their coffers without driving away business, so they will do their best to hit that sweet spot. These decision makers—and the associated state-owned enterprises, regulatory bodies, tax beneficiaries—will find it very hard to ignore the potential tax revenue. Recent estimates from VS Strategies have forecast Colorado to have pulled in over half a billion dollars in tax revenue between legalization in 2014 and the end of this year.
That’s from a population of 5.5 million: 506 million dollars in just three years.
What Do Other Sin Taxes Look Like
Sin taxes are taxes on anything considered harmful to society, such as alcohol and tobacco. There have also been lobbyists, advocates, and legislators that have proposed sin taxes for refined sugar additives, fatty foods, coffee, fast food, and anything else the government decides is unhealthy.
The two most suitable comparisons for future marijuana tax rates would be alcohol and tobacco; they’re consumed and controlled in very similar manners.
For tobacco, the correlation between an increase in taxes and the reduction in usage is pretty apparent, although there are other factors to consider, e.g. ban on tobacco advertising and aggressive health warnings. The tax rate for tobacco products varies by province and can be seen in the chart below.