TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, July 15, 2017

Tax Low To Get High: Governments Should Keep Weed Taxes Down

National Post op-ed:  Tax Low to Get High: Governments Should Keep Weed Taxes Down, by Arthur Cockfield (Queen’s University):

With the introduction of draft legislation to legalize marijuana by July 2018, the Liberal government is moving forward on its election promise. But as lawmakers polish the legislation to promote the best policy outcomes, they face a key challenge — they must ensure that any new tax measures encourage marijuana producers, distributors and sellers to become tax-compliant.

In terms of tax policy, Finance Minister Bill Morneau has wisely urged his provincial counterparts to keep taxes low on legal pot. As discussed in a report by the Office of the Parliamentary Budget Officer, if taxes are too high, then consumers will continue to use the black market. That’s a problem given more than 300 organized crime groups in Canada currently generate roughly $7 billion a year in illegal weed.

To keep the market out of the hands of the mob, the government should also reject “sin taxes” on marijuana. Those high taxes slapped on alcohol and cigarettes already encourage a black market in booze and smokes worth billions of dollars a year.

Instead, pot sales should only initially be subjected to the Harmonized Sales Tax (HST) at a total combined rate of 12 per cent to 13 per cent (with the federal Goods and Services Tax rate of five per cent and an average provincial sales tax rate between seven and eight per cent). The federal government should top up its five per cent Goods and Services Tax by an additional seven per cent to share revenues with provinces that don’t have a provincial sales tax (Alberta, for example) or have a separate one that is not harmonized with the HST (like British Columbia).

But even this low-tax strategy will fail unless the new regulatory regime allows for the development of a vibrant and innovative market. Here’s the main problem: Canada’s licensed medical marijuana companies — Big Pot — currently produce less than five per cent of the marijuana consumed by Canadians. The rest is provided by the black market.

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The article makes a point that the title glosses over: The marijuana tax rates that need to be kept down are the initial rates.

The article concludes, "Whatever the solution, the government needs to keep any regulations flexible so that it can monitor results and, if necessary, modify the rules to promote the best possible policy outcomes, including potential future tax hikes."

Posted by: Pat Oglesby | Jul 15, 2017 9:15:13 AM