Marijuana legalization is coming to Canada next year, and the nation’s Parliamentary Budget Officer believes the market will be initially lower than many estimates but grow over time as the industry establishes itself.
Tax revenue from marijuana sales will initially be in the hundreds of millions and then grow steadily as the market matures, according to Canada’s Parliamentary Budget Officer (PBO). In a report published November 1, PBO Jean-Denis Fréchette examined the fiscal considerations of Canada legalizing marijuana. Canada’s federal government intends to introduce legislation to legalize and regulate recreational marijuana in Spring 2017, with sales expected to begin January 2018.
Recognizing that demand, pricing and black market competition will ultimately influence revenue, the PBO report estimates that the government will collect about $618 million in the early stages of legalization. That number, says the PBO, will grow over time.
“As the legal cannabis market matures, the potential for government to capture fiscal revenues will grow,” the report reads.
“Production costs for the legal industry are expected to decline, creating space for government to collect a portion of the cost savings without increasing the legal retail price. Further, a potential consumer shift to more value-added cannabis products could create a larger tax base. Finally, as the legal market becomes more entrenched, more Canadians may opt into the legal market, resulting in higher revenues.”
The PBO expects that interest in consuming cannabis will grow as the market establishes itself and estimates that the number of individuals aged 15 and over that will use marijuana at least once will grow from 4.6 million in 2018 to 5.2 million in 2021. Subsequently, the amount of cannabis consumed over that time will grow from 655 to 734 metric tons.
The marijuana market projections from the PBO are considerably lower than the forecast outlooks published by independent firms. A recent study projected that Canada’s cannabis market would be worth nearly $23 billion with recreational use legalization and that Canadian growers would need to produce 600,000 kilograms of marijuana to keep up with the nation’s demand. CIBC World Markets issued a report at the beginning of the year that estimated the federal and provincial taxes could be an estimated $5 billion a year.
It’s competition from the black market that the PBO believes will limit the initial value of the nation’s legal market. The concern, the report claims, is that the federal government is going to have a difficult time not “pushing the price of legal cannabis significantly above the illegal market price.”
“Ultimately, no one knows exactly how legalization will impact the cannabis market — in particular, how use patterns will evolve, especially among frequent or youth consumers; how illicit and legal market prices will respond; the extent to which Canadians will participate in the recreational, medical and illicit markets; or how consumer tastes and product offerings, including value-added products, will change,” reads the report.
Sixty percent of the tax revenue collected will go to provincial governments, while 40 percent will be allocated to the federal government, the PBO report notes. Canadian Prime Minister Justin Trudeau, who has vowed to legalize marijuana, has said the revenue collected from marijuana sales should go toward programs designed to curb youth drug use, addiction treatment, and mental health support and education programs.
Trudeau has said his interest in legalizing marijuana isn’t economy related, but rather to reduce illegal activity and manage teen marijuana use.