National Post (National Edition)
TAXING POT BACK TO THE BLACK MARKET.
On July 12, 2018, Health Canada released a consultation document setting out a proposed cost-recovery regime for cannabis consisting of four fees: an application screening fee; an import/export fee; a security screening fee; and an annual regulatory fee. The additional user fees being proposed are based on a valid cost-recovery principle that the public should not bear the costs of government activities where private parties derive the primary benefit. The challenge is that this latter fee alone will amount to 2.3 per cent of the gross sales revenue of larger licensees, adding millions of dollars to their cost base.
The proposal states that these fees will apply to cannabis licence holders whose activities will create the greatest need for public expenditures and who will benefit most from the new regulatory regime. This includes holders of nursery, cultivation, processing and sales licences under the Cannabis Act.
The proposal goes on to state: “The goal of achieving full cost recovery is balanced against two important policy objectives for the Government of Canada: supporting a diverse, national cannabis industry that includes smaller entities and continuing to ensure that individuals who have the authorization of their health care practitioner have access to cannabis for medical purposes.”
For this reason, the proposal discounts some fees for nurseries and “micro class” licences and exempts licensees who sell cannabis exclusively for medical purposes.
Apart from these goals, the proposal makes no reference to the government’s often-repeated primary public policy objectives of cannabis legalization: (1) to keep cannabis out of the hands of youth; and (2) to keep profits out of the pockets of organized crime.
Nor does the proposal refer to the taxes that the federal and provincial governments have already announced they will impose on cannabis. These include an excise duty of $1/gram or 10 per cent of the producer’s selling price, whichever is higher, and GST/HST depending on the province of sale.
It also fails to acknowledge that cost recovery for government services is not imposed on many industries whose products are then also subject to special taxes, like those proposed to be applied on cannabis.
The legal form of a user fee is not the same as a tax. The former is approved by cabinet and passed by order-in-council; the latter is proposed in legislation and passed by Parliament. However, the ultimate impact of fees and taxes may well be exactly the same.
The party that remits a fee or tax is not necessarily the party that bears its ultimate burden. Consider the corporate income tax, for example. Although it is based on a corporation’s taxable revenue and remitted by the corporation as the legally liable entity, under many market conditions the actual incidence of the tax ultimately falls on consumers through higher prices, labour (employees) through lower wages, shareholders through lower returns or some combination of all three. The same principle applies to user fees.
Why is this important in the context of cannabis legalization?
To the extent that user fees and taxes are both passed on to consumers in the form of higher retail prices, the main policy objectives of keeping cannabis out of the hands of youth and profits out of the pockets of organized crime may be undermined, if not defeated.
Higher prices in the taxed legal market may discourage consumption of legal products, especially by youth who are more price sensitive, but it may only push more of their consumption to the untaxed illegal market where prices are lower.
Here are the numbers to help paint a bigger picture.
The government’s 2017 Fall Economic Statement identified federal spending of $553 million over the next five years to legalize and regulate cannabis. Health Canada’s consultation document states that the government will recover $421 million of that through its proposed user fees. It refers to the remaining $132 million in spending as “ineligible costs” related to enforcing criminal law and the costs of registering individuals to produce limited amounts of cannabis for their own medical purposes. The document goes on to state that these user fees will be monitored and hints they could be adjusted upward to reflect increases in regulatory costs related to developments like the sale of edible products once they are allowed to come on the market.
Estimates by the Parliamentary Budget Office are that upwards of $650 million in GST/HST revenue per year could be raised on cannabis sales alone. Under a two-year federal-provincial revenue sharing agreement, the additional excise duty revenue will be shared 25/75 by the federal/provincial governments, with the federal share capped at $100 million annually. But all bets are off as to how high these excise duty and provincial tax rates may climb after the expiration of this agreement.
With government fees and taxes amounting to hundreds of millions a year passed on to consumers, and with legal producers, distributors and sellers expecting robust returns on their initial capital investments, it raises the question of whether the government’s cost recovery objectives are working at crosspurposes with its legalization objectives.
Voters will judge the government on how well it achieves its two stated public policy objectives. While shareholders will judge cannabis companies on the returns on their investments, and not on the market share of legal versus illegal cannabis.
It is often said that no one likes higher taxes. For every golden rule there is an exception. Cannabis growers and dealers operating in the black market may applaud the government if they watch their market share and illicit profit margins rise.
THE POLICY OBJECTIVE OF KEEPING CANNABIS AWAY FROM YOUTH AND ORGANIZED CRIME MAY BE UNDERMINED BY FEES.