A new report from Canada’s Parliamentary Budget Officer is warning Canadians to temper their expectations about how much green will flow from legal pot, at least in the early days.
Ottawa is expected to introduce legislation legalizing marijuana for recreational use next spring, with legal sales kicking off in January of 2018.
But while some have projected a cash bonanza, the report warns competition with the black market could mean some of those profits will go up in smoke.
The report says that the average street price in Canada for illegal pot comes in at about $8.84 per gram, while the pre-tax price for legal buds will come in around $7.50.
It warns that doesn’t leave much room for tax, without pushing prices so high customers move to the black market.
“When legalization occurs, the government may have little fiscal space to apply tax without pushing the price of legal cannabis significantly above the illegal market price.”
The report says adding sales tax alone will likely bring prices in line with the illicit market, and that the addition of any federal excise tax would likely push it over the top.
It also warns price issues could cause headaches from a policy perspective: Officials looking to raise prices to discourage consumption among youth could both cut into profits and drive people to illegal sellers.
“The higher the premium for legal cannabis over the illicit price, the more Canadians will purchase cannabis on the illicit market.”
The report says that stiff price competition means legislators should expect revenues in the hundreds of millions, not the windfall of billions some had hoped for, at least in the initial years.
For 2018 – the first year of legal sales, it projects an estimated $610 million in revenue, 60% of which would flow to the provinces.
The report does note that as time goes on that figure could rise, as legal production costs go down opening up more room for regulators to tax without pushing prices too high, and as producers move into more value added products like edibles.
It also projects a growing pot market, with an anticipated 4.6-million users partaking once legal sales are allowed in 2018 growing by more than half a million to 5.2-million by 2021.