Cannabis tax gains overstated: analysis

A regulated market in cannabis would net $70 million in new tax revenue, an independent analysis commissioned by Fairfax Media reveals.

Modelling by the New Zealand Institute of Economic Research (NZIER) shows a 25 per cent excise tax on legal marijuana would raise $40m, on top of an extra $30m from GST.

The figures are well short of an earlier estimate by the Treasury, which put the potential tax take at $150m per year.

Despite the dramatically lower revenue estimate, NZIER principal economist Peter Wilson said he still felt the drug should be legalised.

‘‘Prohibition has been an expensive failure. It has allowed illegal groups to charge higher prices and there is no evidence that it has changed consumption,’’ Wilson said.

A legal market in cannabis would drive the consumer price down and significantly cut the cost of producing the crop, NZIER believes.

Wilson suggested a 25 per cent excise on cannabis, based on the experience in Colorado, United States.

After the drug was legalised in Colorado, the black market for cannabis shrunk dramatically as users put a premium on being able to buy a product of uniform standard, that had been subject to quality checks and was legal.

‘‘One feature that has been very popular with users is the requirement in Colorado for the strength of marijuana to be independently tested and displayed on package,’’ Wilson said.

The NZIER research projects that ‘‘tinnies’’ (1.5-gram parcels) worth about $161m in total would be subject to the tax.

An estimate by Treasury last year similarly suggested cannabis tax could rake in $150 million a year - about half of the excise generated by cigarettes.

A Ministry of Health ‘‘drug harm index’’ last year suggested the Government was missing out on about $68m in GST and $145m in company tax.

Eric Crampton, chief economist for think tank The New Zealand Initiative, has also tried to estimate the excise tax take on cannabis, coming up with a range of $75m to $200m in 2013.

The big uncertainty was the production costs, because as an illegal drug ‘‘nobody really knows’’, Crampton said.

But he agreed the price would almost certainly come down as the premium attached to the risk of producing an illegal commodity was removed.

Production would become more efficient, ‘‘because people are able to produce to scale without being worried about being raided’’.

‘‘It seems like a natural market for New Zealand. We do seem to be missing a trick in that, if Northland is as good as they say it is.’’

Proponents also believe a tax on cannabis could mitigate some of the harm it causes.

The ‘‘drug harm index’’ puts the wider cost to society from cannabis-related crime, loss of wealth and police interventions at $1.28 billion.

While some of those costs would disappear if cannabis sales were no longer a crime, the health costs would remain.

The tax windfall from cannabis could go back into health measures, according to Drug Foundation executive director Ross Bell. ‘‘There are 50,000 people who need help for their alcohol and drug problems any given year who cannot get that help,’’ Bell said.

He favours an initially tough legalisation regime, treating cannabis similarly to heavily taxed tobacco or alcohol.