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Forgone Pot-ential: Lost Tax Revenues of Cannabis Legalization

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In this edition of Graphic Intelligence, we show the estimated effects of legal marijuana prices on tax losses stemming from both the black market and supply shortages during the first year of cannabis legalization.

Canada recently ended the prohibition of recreational marijuana. Projections indicate a continuing black market amid shortages of legal marijuana supply will result in forgone tax revenues in the first year of legalization. Though there will not be enough legal cannabis to supply all of the recreational demand in Canada, the price of legal marijuana affects how much recreational demand will be met in the legal market and how much will potentially be met in the black market, notably if those “street” prices are lower.

To investigate the potential effects of supply shortages in the retail market, we estimate legal market share and tax losses associated with prices in the legal market of $6 to $11 per gram (before taxes). Choosing a level of demand, a specific price for legal marijuana, and the applicable taxes reveals the corresponding tax losses due to supply shortages or the black market. Tax rates are applied consistent with the coordinated excise taxation framework for cannabis and current provincial and federal sales taxes (GST/HST/PST/QST).

To learn more about Canada’s legal cannabis market, read “Cannabis Countdown:  Estimating the Size of the Illegal Markets and Lost Tax Revenue Post-Legalization” by Anindya Sen and Rosalie Wyonch

© 2019 C.D. Howe Institute. All Rights Reserved.
© 2019 C.D. Howe Institute. All Rights Reserved.