PBO says tax revenues on legal marijuana to be less than $1 billion at outset

OTTAWA – The parliamentary budget watchdog is being a bit of a buzz kill when it comes to forecasting government revenue windfalls from legalized marijuana.

“We’re talking millions and millions — not billions and billions — of dollars of revenues,” Jean-Denis Frechette, the parliamentary budget officer, said Tuesday after releasing a study entitled, “Legalized Cannabis: Fiscal Considerations.”

The 77-page report finds that the federal government may have little fiscal space to heavily tax cannabis the way it does tobacco without pushing the legal price well beyond that of currently illicit pot.

What’s more, the Liberal government’s stated aims of decreasing marijuana use and accessibility for young Canadians while choking off pot revenues from organized crime will require a delicate balancing act, the study found.

Price legal pot too high and the black market will continue to flourish. Too low and governments could be seen to be encouraging its use.

The report projects sales tax revenue in 2018 could be as low as $356 million and as high as $959 million, with a likely take of about $618 million based on legalized retail cannabis selling for $9 per gram — in line with current street prices.

Those government revenues will increase in future years for a variety of reasons, says the report, including more consumption and price competition among increasing numbers of licensed producers, which will provide more room for higher marijuana taxation.

But overall, said assistant PBO Mostafa Askari, “the message is that there really isn’t very much room for revenue over time.” He said U.S. states that have legalized have found that revenue streams can’t be tapped too aggressively without pushing the market back underground.

Predictions of a government pot bonanza in the billions of dollars annually have become commonplace since the Liberal government of Justin Trudeau came to office last year promising full legalization.

CIBC World Markets issued a report last January suggesting federal and provincial taxes could pull in as much as $5 billion a year from legal marijuana. A B.C. Liberal party report in 2013 suggested $4 billion annually in taxes from legalized pot.

A recent report from Deloitte posited that recreational marijuana as an industry could generate as much as $22.6 billion in economic activity, including $5 billion to $8.7 billion in retail market sales annually.

But the government has consistently played down any revenue windfall.

“It was never about a money­maker,” Prime Minister Justin Trudeau told The Canadian Press last December shortly after assuming office. “It was always about public health, public safety.”

Pot proceeds, he said, would not go into general revenues but would be earmarked for addiction treatment, mental health support and education programs.

Health Minister Jane Philpott reiterated that goal Tuesday.

“It’s not about the revenue,” Philpott said. “This is the right thing to do from a public health and public safety (standpoint).”

Provinces and territories will also have a significant say in how pot revenues are spent. The PBO study says about 60 per cent of marijuana taxation will flow to the provinces.

The budget office said it consulted with the federal task force that has been asked to plot the legalization path. Former Liberal cabinet minister Anne McLellan is leading the task force, which is to submit its report by the end of this month.

The government’s goal is to introduce legislation next spring, and the PBO anticipates legal sales won’t get underway until 2018.

There are a lot of variables at play in projecting sales and tax revenues, and the report acknowledges that predicting future behaviour in the marijuana market is difficult.

“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.”

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