Defeat black market with low pot taxes: study

A new analysis says governments can wrestle recreational-pot proceeds away from criminals — just so long as they’re not counting on an early windfall from legalized weed.

The study, to be released today by the C.D. Howe Institute think tank, estimates legalized cannabis would generate about $675 million in 2018 in combined federal and provincial revenue through existing sales taxes.

However, if authorities want to raise even more cash in the early days of legalization through additional taxes, they risk undermining their stated priority of squeezing out organized crime, the report says.

The study comes as the Trudeau government prepares to introduce legislation Thursday to begin the process of legalizing pot.

“The government does actually have to choose at the outset between minimizing the black market and a large amount of revenue generation — it can’t do both,” study author Rosalie Wyonch said in an interview.

“However, if they do manage to nearly, fully legitimize the market, that’s when they can start to implement higher tax rates without necessarily re-entrenching the illicit market.”

Using a $9-per-gram example, Wyonch estimates 90 per cent of Canada’s weed market would be legitimate if existing sales taxes were the only taxes applied.

But if governments seek to lift their total tax revenues on pot sales to around $1 billion, she said, illicit sales would likely grow to about half of Canada’s marijuana market.

Policy-makers could hit that threshold by tacking on as little as one loonie per gram, she added.

Wyonch, a C.D. Howe policy analyst, said while the legal-pot revenues will be modest at first, there’s potential for more money to be made once the market matures and large companies streamline their operations.