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Ottawa should strongly consider a sales tax that is a per cent of the sale price as opposed to an excise tax based on grams of purchase.

The federal government has just released the report of its special advisory task force on marijuana legalization. While the report lays out broad strokes, key decisions remain on retail distribution, legal age limit, and taxation that Ottawa and the provinces should agree on soon.

The report recommends that provinces be given the jurisdiction to determine the precise mechanism of retail distribution. However, the report has also recommended against allowing the sale of marijuana in stores that also offer liquor and/or cigarettes. This is consistent with my own study that was released by the C.D. Howe Institute, in which I recommended retail sales through stand-alone stores as opposed to government-owned retail outlets, as is the case in Ontario. Ontario Premier Kathleen Wynne has supported the idea of the provincially owned LCBO distributing marijuana. The idea has also received considerable support from the trade unions representing LCBO employees. A supporting argument is that selling marijuana through LCBO outlets reduces the possibility of underage consumption.

In this respect, the task force has certainly made a sound economic and health policy recommendation. First, there is no reason why the province could not extract revenue from marijuana sales through a wholesale mark-up, without the associated costs of being involved in the actual sale of the product. Second, allowing the sale of marijuana side by side with liquor raises the legitimate concern that buyers may be incented to treat the consumption of both goods as complementary. From a public health perspective, this is certainly not advisable. Neither Colorado nor Washington permits the sale of marijuana through liquor outlets. Third, it is difficult to believe that independent stores would not perform an adequate job of verifying legal age limits if the penalty is suspension of the retailer’s sales permit, implying significant economic losses.   

However, the task force’s proposed legal age limit of 18 raises some valid concerns. The task force has acknowledged that a higher age limit of 19 is possible if a province wishes to harmonize marijuana regulation with corresponding alcohol minimum ages. On the other hand, the federal government should consider an even higher national legal consumption age for marijuana, possibly at 21 years of age. Such a policy would reflect the scientific consensus that early consumption of marijuana might impair mental development, as well as result in other adverse health-related outcomes. There should be natural skepticism of the efficacy of a high age limit, as teens would be able to obtain marijuana from older individuals. However, the point should be to send a strong message on the dangers of youth consumption. The federal government might be able to address distribution to youth by retaining some element of criminal code provisions relating to drug trafficking and sales.

A key policy tool to restrict youth access would be through high taxes. However, as correctly noted by the task force, high taxes would result in the creation of a lucrative black market and defeat a critical objective of legalization. Apart from observing that higher taxes should be levied on products with higher potency, the task force did not make any recommendation on tax structure or on possible tax rates. Ottawa should strongly consider a sales tax that is a per cent of the sale price as opposed to an excise tax based on grams of purchase. The advantages of sales taxes is that they do not have to be set considering a possible market price and can be employed even when it is difficult to tax specific quantities.

In general, while the report does make several recommendations, it is a bit imprecise on policy specifics on some rather key points of retail distribution, minimum age of purchase and taxation.

Published in the Financial Post

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