Canadian Prime Minister Justin Trudeau promised his new administration would move to “legalize, regulate and restrict access to marijuana.” Currently, medical marijuana (cannabis legally prescribed by authorized medical providers and provided by licensed producers) is subject to a 5% federal tax, and courts are still in the process of determining if provincial taxes may also be applied.
How will the tax structure on recreational cannabis look if and when Canada legalizes it? We may be able to get some idea from looking to Colorado and Washington State, both of which have experienced at least a year of legalization and taxation.
In 2015, Colorado took in more tax dollars from cannabis than from alcohol. The state’s overall tax rate on cannabis is about 29%. Washington, which took in $70 million during its first full year of legalization, has an overall tax rate on cannabis products of about 44%. (For comparison, Washington’s tax on beer is about 11%.)
Taxes on cannabis are often lumped with those on tobacco, alcohol and gambling as “sin taxes.” This category is broadly defined as revenue intended to curb consumption of undesirable or harmful products, and to offset the costs to society stemming that consumption. The rates of these taxes typically are much higher than standard sales taxes.
So, why does the Canadian government make taxation such a fundamental aspect of its plan to legalize cannabis? Why else? Current taxes on alcohol and tobacco bring in more than $15 billion annually. A study by the Fraser Institute concludes that cannabis legalization could add another billion to that.
Taxing cannabis is nearly always accepted as a given when considering legalization, but should it be? Is use of cannabis a “sin,” deleterious to society and therefore something the state should charge people for using? Before answering, let’s consider the following:
• To tens of thousands of Canadian citizens (and millions worldwide), cannabis is medicine. In Canada all prescribed drugs—except cannabis—are “zero-rated,” meaning no sales tax is collected. In the U.S., only two states levy a tax on prescription medicine. Nearly all arguments for legalization lead with the position that cannabis is a useful, relatively harm-free treatment for a number of illnesses (albeit one that has yet to be conclusively proven effective through clinical scientific testing). Should we levy a tax on something that may actually improve people’s health?
• Cannabis is much less harmful than alcohol and tobacco. Indeed, there appears to be no record of someone fatally overdosing on cannabis, something that can’t be said of nearly any other substance (certainly not many prescription drugs).
A strong argument can be made that the harm to individuals and the cost to the state from cannabis are nearly exclusively attributable to enforcement of prohibition. The war on cannabis has ruined many more lives than its consumption and has cost many billions of dollars in the process. That being the case, simply repealing prohibition could result in huge savings for communities and governments.
• A tax on cannabis is regressive. All “sin taxes” land disproportionately on the poor, who end up paying a higher percentage of their income.
• High taxes can turn consumers toward the black market. When the per-cigarette tax was raised in 1991, it created what was then estimated to be a $5 billion black market in tobacco, with a record number of Canadians crossing the border to purchase tobacco in the U.S. (The tax was reversed in 1994.) Under cannabis prohibition, billions of dollars are diverted to the black market, which often finances violent gangs and cartels. That situation won’t change if taxes create legal cannabis prices that aren’t competitive.
The reason sin taxes are generally tolerated is that the only people who pay them are the ones who use the product. But cannabis is different. The perception of cannabis being harmful to the individual and a threat to society is what activists have fought against for decades. Because of their efforts, the overwhelming majority of Canadians now endorse the idea of cannabis as a legal, safe and freely available substance—one that people should be able to choose as a relatively harmless complement to their lifestyle, and one that may likely be an effective treatment for some illnesses. How does one sensibly reconcile cannabis as both benefit and “sin?”
As is so often the case in politics, the most pragmatic and acceptable approach may be a compromise: no consumer taxes on medical cannabis prescribed by healthcare providers; taxes on recreational cannabis, but not so high that resulting prices drive consumers to the black market. In addition, it may be worth considering some of the precedents established in Colorado and Washington, and formally earmark a portion the taxes generated from recreational cannabis to fund education, drug abuse treatment programs and cannabis research. These actions will further increase the potential public health benefits associated with finally ending Canada’s long, expensive and ultimately futile experience with cannabis prohibition.