The legal toke and the tax take

There were two tax stories in the news this week, although one got considerably more coverage than the other.

The first was that Labour will bring back the 39 cent tax bracket for the 2 per cent of taxpayers who earn over $180,000, if re-elected next month. The second, which we heard less about, is that a New Zealand in which cannabis is legalised and regulated could see the drug bring in close to $1 billion in annual tax revenue.

Given that Labour’s new tax-therich threshold is expected to gather around $550 million, it means the legal cannabis tax take is worth almost twice as much. The nearly $1b is made up of excise, GST, licence fees, and income and company tax.

The figure is cited in two reports on recreational cannabis regulation and harm reduction, produced by Business and Economic Research Ltd (BERL) for the Ministry of Justice. The reports were not supposed to see the light of day before the referendum, but were released under the Official Information Act.

They outlined a proposed legal cannabis market in New Zealand and helped inform the Government’s thinking, although Justice Minister Andrew Little has warned they are not a template.

Some big numbers jumped out immediately. BERL estimated that roughly 74 tonnes of cannabis are consumed every year in New Zealand, which could rise as high as 103 tonnes after legalisation, before levelling off, based on overseas examples. The current illegal market is worth around $1.5b, which could climb to $1.9b after legalisation.

Regardless of views on cannabis, it hints at the scale of economic activity that goes untaxed.

The reports say that retail could be spread across 420 shops the length of New Zealand. This detail has excited the reports’ more attentive readers, as the number 420 is said to be a cannabis user’s in-joke. BERL also says legalisation would create around 5000 new jobs.

Recreational drug use has traditionally been framed as a moral issue, a criminal issue and increasingly as a health issue, but rarely as an economic issue.

It can also be seen as a racial issue. Green MP Chloe Swarbrick said this week that while 80 per cent of adult New Zealanders have smoked cannabis, including many politicians, legalisation would reduce Ma¯ori cannabis convictions by nearly 1300 per year.

That figure was cited in a report released by the prime minister’s chief science adviser, Juliet Gerrard, in July. Legalisation means more drug treatment services would have to be funded to compensate, through regulated cannabis sales.

The BERL model proposes a harm reduction levy paid for by collecting $4 per gram of cannabis from licensed retailers, creating a maximum fund of $440m. Successful harm reduction could see up to 5900 fewer cannabis consumers with long-term health conditions and up to 7800 fewer cannabis consumers with mental health diagnoses. The cannabis vote is likely to be a very close one. A Horizon Research survey, commissioned for Helius Therapeutics and provided to Stuff this month, had the pro-legalisation and anti-legalisation camps neck and neck at 49.5 per cent. That tips slightly towards the ‘‘no’’ camp when only registered voters who will definitely vote in October are counted.

Overall, the reports suggest legalisation is more likely to reduce social harm than the status quo, with some positive economic sideeffects. We will see soon enough if the public accepts that argument.

The current illegal market is worth around $1.5 billion.