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.
Alcohol is also taxed differently in each province, plus the exact excise tax rates also vary by product type (beer, wine, or spirit) and can vary by amount of alcohol in that product (wine with a higher alcohol content being taxed differently than lower alcohol content wine). This can make it very difficult to track and compare by province. Fortunately, in 2016 CBC News did a price comparison of commonly found alcoholic beverages by province: a spirit (750 ml Lamb’s Rum), beer (12 pack of Labatt Blue), and a bottle of wine (bottle of Lindeman's Bin 50 Shiraz). These prices would include not only the excise taxes but also the cost of transportation and other incidentals. It should also be noted that this data doesn’t include Alberta or Québec because they are not solely state-owned retail models, and the territories are also excluded. The results are shown in the chart below.
Both the tobacco tax rates and alcohol prices show little variation province to province, with perhaps BC, Alberta, Ontario, and Québec having lower costs/taxes relative to the maritime provinces and territories. We’ll have to see what each province chooses to do when it comes to marijuana taxes to see if this continues to hold true for cannabis.
The Cost of Marijuana Versus Alcohol or Tobacco
In 2002 the Canadian Centre on Substance Abuse (CCSA) released a report indicating that the cost of alcohol-related harm is $14.6 billion dollars a year. Tobacco was estimated at an even higher cost of $17 billion dollars a year. Illegal drugs (which would have included marijuana, amongst many others) was estimated at the relatively low cost of $8.2 billion dollars a year.
Negative outcomes from alcohol abuse include liver-related diseases, motor vehicle deaths, and general poor health and productivity. Tobacco products are strongly linked to various health ailments, such as chronic obstructive pulmonary disorder (COPD), various cancers, and coronary heart disease. It is also a risk factor for a plethora of other horrible diseases.
On the other hand, marijuana is increasingly accepted as a medicinal treatment for an ever increasing number of ailments: depression, insomnia, multiple sclerosis, appetite loss, epilepsy, Crohn's disease, and post-traumatic stress disorder (PTSD), to name a few.
However, these therapeutic uses must be measured against the possible negative consequences of marijuana, including addiction, abnormal brain development with regular use, chronic bronchitis, possible association with mental disorders (schizophrenia, anxiety, depression), and the persistent idea of marijuana being a drug that will lead to stronger drug use and addiction—the last one despite the fact that alcohol was recently reported as the best example of a 'gateway drug', a term that is outdated and incorrect, but still seems to be part of the conversation. We'd be better off evaluating 'gateway socioeconomic classes'.
Without adequate research into the negative outcomes of regular marijuana usage we can’t yet tell the direct and indirect cost of its usage to Canadians, but so far it seems unlikely to result in a measurable financial burden similar to that of alcohol or tobacco. But should marijuana be taxed less because of this? And is that a factor likely to have an impact on the decision when it comes to marijuana tax rates?
Comparing Alcohol, Tobacco, and Marijuana
In the end, North American cultural attitudes towards alcohol and its tax rates do not accurately convey the very real risk to health and cost to the economy. This is no better demonstrated than by alcohol advertising in Canada, which you’ll find on television, radio, and at any number of sporting events. This level of cultural acceptance isn’t realistic for the cannabis industry and it would be difficult for policy makers to permit excise tax rates similar to alcohol for marijuana.
At the same time, aggressively taxing marijuana like tobacco when the health consequences are not at all similar is irrational and may encourage black market trade.
Look for politicians and policy makers to strike a balance between these two points and to also learn from the examples set in the United States—particularly in Colorado and Washington. Although these states are smaller than Canada, learning from their growing pains would be the clever thing to do.
It may also be wise to see how developments in California proceed. They will be the largest population to have a legal recreational market. With a larger population than Canada, they may set the standard to follow.
It is important for the Canadian public at large to be aware of the tax policies outlined herein. Understanding the situation as it exists for comparable products and in other locations allows people to know what is or isn't fair.
Featured image by Will Keightley.