While Canadians are expected to spend billions on legal marijuana, governments won't see a huge boost in tax revenues right out of the gate, warns Canada's Parliamentary Budget Officer (PBO).
In a report released today studying the fiscal considerations of legalizing marijuana, Jean-Denis Fréchette suggests initial revenue for governments from taxation could be in the hundreds of millions of dollars, rather than billions.
But as the market matures, those revenues are likely to grow, according to the analysis. Fréchette expects production costs for the industry will decline and suggests governments could collect a portion of the cost savings.
There are many variables that affect revenue projections, from quantity consumed to price and competition from legal and illicit markets. The report estimates sales tax revenues could be $618 million at the outset of legalization, but that number will grow.
"As the legal cannabis market matures, the potential for government to capture fiscal revenues will grow," it reads.
"Production costs for the legal industry are expected to decline, creating space for government to collect a portion of the cost savings without increasing the legal retail price. Further, a potential consumer shift to more value-added cannabis products could create a larger tax base."
He also expects more Canadians to opt into the legal market as it becomes more entrenched.
The report also suggests that industry stakeholders believe legal marijuana could be sold as early as January 2018.
Where will the money go?
Prime Minister Justin Trudeau has carefully framed legalization as public safety issue, rather than a financial one. Trudeau said marijuana should be legalized to stop young people from using the drug and to take away profits from organized crime.
When it comes to revenues for the government, Trudeau has suggested the money should go to addiction treatment, mental health support and education programs.
Assistant PBO Mostafa Askari said while consumption is expected to increase over the years, experience in other jurisdictions in the U.S. shows that governments can't rely significantly on revenue because the potential is "very low" at first.
But because it's difficult to determine how both illicit and legal markets will respond, there could be a better bottom line if more consumers purchase legal weed.
"As people get used to the legal market, they become more familiar with it, the demand for the legal market may go up," he said. "The government would have more options and more potential to increase its revenue."
The report suggests that 60 per cent of tax revenues would go to provincial governments, with the remainder going to the federal government.
How much tax?
The report identifies a central conundrum for the government: higher pot prices could discourage younger uses from consuming, but might encourage the illicit market.
PBO officials suggest the legal sale of marijuana could begin as early as January 2018. In the first three years, it expects the number of cannabis users aged 15 and over to grow by more than half a million, rising to an estimated 5.2 million in 2021.
It estimates that 98 per cent of cannabis sales would come from those who consume at least once a week or daily.
The head of Canada's marijuana regulation and legalization task force has warned about the initial costs of legalization.
"People — and I think the provinces, the territories and the government of Canada — understand this: do not expect big revenues in the early years," Anne McLellan, the head of Canada's marijuana legalization and regulation task force, told CBC News in September.
"In fact, there are going to be up-front costs that governments at all levels are going to have to absorb."
Prime Minister Justin Trudeau promised to legalize marijuana in the lead-up to the October 2015 election, saying it would help stop young people from using the drug and take money away from organized crime. Since then, the Liberal government has pledged to put forward legislation in spring 2017.
The task force's report advising the government on a range of issues, from where to sell marijuana to the legal age of consumption, is due to be handed over by the end of November.