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Globe and Mail reporter Barrie McKenna.

The Globe and Mail

Donald Trump bumbled into the debate over repealing Obamacare, insisting that "nobody knew" health care was so complicated.

Justin Trudeau may be thinking the same about his plan to legalize recreational marijuana.

Converting a $7-billion-a-year black market into a government-regulated industry is proving to be, well, complicated.

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One of the thorniest problems will be deciphering the economics of taxing marijuana.

Federal Finance Minister Bill Morneau and his provincial counterparts agreed this week on the principle of keeping taxes low and co-ordinating related policies. But virtually all the key details remain unresolved as the clock ticks down to planned legalization a year from now.

At first blush, it all seems pretty simple. Ottawa and the provinces already pocket billions of dollars a year by heavily taxing tobacco and alcohol. It's easy money – and readily justifiable on public policy grounds because higher prices discourage drinking and smoking. So why not just slap a hefty excise tax on cannabis, apply the usual federal and provincial sales taxes and watch the cash pour in?

That's what Colorado did, with mixed results. The state, which legalized recreational cannabis sales in 2014, quickly learned that marijuana smokers, who to tend to be younger, are price-sensitive. Users gravitated to cheaper options. The state put a combined 30-per-cent tax on marijuana, but managed to steer less than 10 per cent of consumption into the legal market. Consumers continued to buy roughly half or more of their marijuana on the black market, and there was a surge in people getting prescriptions for medicinal marijuana, taxed at a lower 11-per-cent rate.

A significant portion of the retail market is bound to remain illicit – no matter the price – because younger teens won't be allowed to buy the product legally. Ottawa is recommending a minimum age of 18 to purchase, but that's largely up to the provinces and, if they choose a higher threshold, they risk encouraging the black market.

Indeed, years of efforts to combat smuggling and production of illicit tobacco products has failed to completely stamp out the black market in Canada. Anywhere from 15 per cent to 33 per cent of cigarettes sold in Ontario and Quebec are illegal, fed by a network of contraband factories.

The lesson for Ottawa and the provinces is that they need to be mindful of the price gap between legal and illegal sales. The higher the gap, the less successful the government will be at shutting down the illegal market and forcing criminals out of business.

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Research by the Parliamentary Budget Officer has estimated that if the after-tax price of cannabis was $10 a gram and the illegal price was $9, more than a third of sales would stay on the street. Raise the price spread to $5 a gram, and roughly two-thirds of the market would remain underground.

Taxing marijuana according to its concentration of tetrahydrocannabinol – the chemical in marijuana that creates the buzz – could prove more technically challenging, Mr. Morneau said.

On the other hand, tax all marijuana at the same rate – regardless of potency – and consumers would buy more and stronger stuff, such as the infamous BC Bud. And that would counter the public-policy objective of discouraging people from getting impaired.

Also unclear is how an excise tax on edible marijuana would work.

A 2016 federal task force that looked at legalization acknowledged it won't be easy orchestrating a perfect price point that will discourage consumption and raise revenue, without driving illegal sales. The panel urged Ottawa to create a "flexible system than can adapt tax and price approaches to changes in the marketplace."

Ottawa and the provinces could be facing years of micromanaging to get the balance right.

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