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In this Oct. 12, 2016, photo, recently harvested marijuana buds dry at a farm near Garberville, Calif. (Rich Pedroncelli/AP)
In this Oct. 12, 2016, photo, recently harvested marijuana buds dry at a farm near Garberville, Calif. (Rich Pedroncelli/AP)

Pot tax would reduce profits, allow black market to thrive: report Add to ...

The parliamentary budget watchdog says Ottawa stands to generate hundreds of millions of dollars – not billions – from the first year of recreational marijuana sales, and that the black market will continue to bloom if the federal government applies much more than a sales tax on legal pot.

In a report released on Tuesday, the Office of the Parliamentary Budget Officer says sales tax revenue could be as low as $356-million and as high as $959-million, with a likely take of about $618-million based on legalized retail cannabis selling for $9 per gram – in line with current street prices.

Those government revenues will increase in future years for a variety of reasons, says the report, including more consumption and price competition among increasing numbers of licensed producers.

But Ottawa may not be able to tax cannabis in the same way as tobacco without pushing the price well beyond that of illegal pot, the report added.

Assistant budget officer Mostafa Askari, who helped with the report, said that overall “the message is that there really isn’t very much room for revenue over time.”

He said U.S. states that have legalized pot have found that revenue streams cannot be tapped too aggressively without pushing the market back underground.

Using Colorado’s first full year of sales as an example, the report states a 30-per-cent combined tax on recreational products meant only 5 to 10 per cent of cannabis consumers bought them. More than half continued to use underground dealers and the rest got prescriptions for legal medical marijuana, which was taxed at less than 11 per cent, the report stated.

The more people that are allowed to produce and sell products, the more the price of legal cannabis will come down, said Kirk Tousaw, a lawyer who helped win a constitutional challenge that led to an overhaul of the medical marijuana system this summer after a judge ruled it was too expensive.

“The driving factor is going to be: Can producers easily enter the production space or is it going to be top heavy as it is now,” said Mr. Tousaw, who also represents dozens of illegal dispensaries.

The budget office’s report stated that, in the most recent fiscal year, more than 30 commercial growers licensed to sell medical marijuana produced less than two per cent of the 655 metric tonnes of cannabis recreational consumers will want in 2018.

Mr. Tousaw said these medical cannabis producers are forced to charge clients more than illicit producers do because of an onerous federal regulatory regime. These licensed medical producers mail cannabis to a small portion of the hundreds of thousands of people using the drug, many of whom have turned to illegal storefront dispensaries.

“It’s absurd and imposes tremendous cost on producers just to comply with unnecessary rules and restrictions,” he said of the current medical system of production.

Predictions of a government pot bonanza in the billions of dollars annually have become common since the Liberal government of Justin Trudeau came to office last year promising full legalization.

A B.C. Liberal Party report in 2013 suggested $4-billion annually in taxes from legalized pot. CIBC World Markets issued a report last January saying federal and provincial taxes could pull in as much as $5-billion a year from legal marijuana. A new report from a Denver-based consulting firm says CIBC over-estimated the potential tax revenues by about 300 per cent.

The government has played down any revenue windfall.

The Liberals have said any pot proceeds would be directed to addiction treatment, mental health support and education programs.

Provinces and territories will also have a significant say in how cannabis revenues are spent. The PBO study says about 60 per cent of marijuana taxation will flow to the provinces.

Vancouver councillor Kerry Jang, architect of the local dispensary bylaw, said cities deserve to receive some of that money if they are expected to enforce federal cannabis laws.

“We’re not going to be increasing taxes on our ratepayers for this,” he said.

With a report from The Canadian Press

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A look at some of the numbers associated with a legalized recreational marijuana market in Canada as compiled by the Parliamentary Budget Officer:

655: The number of metric tonnes of marijuana expected to be consumed by Canadians in 2018, rising to 734 metric tonnes in 2021.

98 per cent: That’s how much of Canada’s current yearly marijuana consumption is estimated to be consumed by the 41 per cent of pot users who report daily or weekly use.

12.2 per cent: Proportion of Canada’s non-territorial population aged 15 and over that reported using cannabis at least once in 2011.

1.8 per cent: Proportion of population that reported using marijuana daily in 2011.

4.6 million: The midpoint of the PBO’s estimated number of Canadian cannabis consumers in 2018, rising to 5.2 million by 2021.

1.7 million: The midpoint estimate of 2018 cannabis users aged 15-24, more than a third of the total marijuana-using population. “In contrast, only 18.6 per cent would be in the age group 45 to 64, while seniors aged 65 and over would account for just 1.1 per cent,” says the PBO study.

36: The number of licences issued to produce and sell medical cannabis as of Oct. 28, 2016. “Hundreds of other applications are ’in progress’,” says the report.

4,000: The number of kilograms of dried medical cannabis produced by licensed producers in the fourth quarter of 2015-16, representing only 2.5 per cent of estimated total quarterly demand in 2018.

5: The number of North American jurisdictions that have legalized the production, distribution and sale of recreational cannabis. Canada would join Alaska, Colorado, the District of Columbia, Oregon and Washington as recreational pot markets, while five other U.S. states have ballot measures this month on legalizing recreational pot. Uruguay has also legalized, while the Netherlands allows retail sales, but has not legalized cultivation and distribution.

Source: The Canadian Press, Parliamentary Budget Office

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