Why the cannabis tax will only be one small part of government windfall: Don Pittis

Governments across Canada are already making money on legal recreational marijuana and they haven't sold a gram here.

As governments at all levels bicker about their slice of the pot pie, experts say the excise tax they are fighting over is only one part of the pickings governments will harvest from expanding legal sales.

Yesterday, the country's biggest marijuana producer, Canopy Growth, which was an early entrant into the medical marijuana market, announced its third-quarter revenue had doubled compared to a year ago. As of Dec. 31, the company already had 701 employees, and a Canopy representative says they have hundreds of job openings they are hoping to fill across the country.

Taxing legal incomes

Unlike people working in the black market, each one of those employees will pay provincial and federal income tax, contribute to employment insurance and their national pension plan.

"Many people are surprised to learn that income from illegal activities, such as income earned from theft, fraud, prostitution, and the sale of drugs and narcotics, is taxable," Rotfleisch and Samulovitch PC, a Toronto-based boutique tax law firm, says on its website. 

But as the site goes on to say, generally the Canada Revenue Agency only gets to take its cut after criminals have been brought to justice. For some reason, illegal growers, smugglers and dealers have been reluctant to report their income voluntarily.

In income taxes alone, the growth from the legal marijuana industry will be lucrative.

"Going forward, yes, absolutely, when the market expands, really grows, it creates new employment," says Anindya Sen, an economics professor at the University of Waterloo, who studies the policy effects of taxation.

At this stage, he says, many employees have merely transferred from other legal jobs. But even those jobs help use up the economy's spare workers, meaning other people will fill the jobs they left. New hires will eventually be replacing workers in the illegal sector, who paid no tax.

Sen foresees Canada, as a global leader in well-regulated legal production, becoming a booming export producer as countries in the European Union and elsewhere recognize the harm-reduction opportunities of Canada's legalized market.

"I think that there will be significant economic impacts from this industry," Sen says. "I mean huge impacts."

All kinds of money

At every level, growing economic activity, or gross domestic product (GDP), translates into government revenue.

Storefronts will pay municipal taxes. Rural production and storage facilities pay property taxes. Businesses pay taxes on profits. They also pay licence fees.

Now that Ontario has designated Shopify as the government's sales platform, marijuana money will be going into new technology. The new legality of the drug, expected to be official next summer, will likely spur more research and development on medical uses for marijuana, its derivatives and analogues.

And that's not to mention cutting the cost of arresting and incarcerating people criminalized for cannabis use.

Despite diligent efforts to estimate how much marijuana Canadians consume, Statistics Canada has not released a projection of the total post-legalization value of the industry. The parliamentary budget officer (PBO) has estimated the total impact of domestic sales on the economy will be similar to that of the beer market.

The OECD, the rich countries' think-tank, says Canada collects just under 32 per cent of GDP in taxes of all kinds. So, if the PBO estimate of a possible $6-billion bump to GDP from the domestic marijuana industry is accurate, total government revenue could be as high as $2 billion, much more than the $1 a gram planned for the excise tax.

Wiping out competition

Of course, some of that money would already be flowing into government coffers because illicit earnings also make their way into the legal economy. Making exact calculations is difficult, but policy analyst Rosalie Wyonch says the legal marijuana tax revenue from such things as business and income taxes will be significant.

"We can say that it's more substantial than the excise taxes," says Wyonch, who has written policy advice on legal marijuana for the C.D. Howe Institute, a Canadian think-tank.

She says one of the key things governments can do to increase revenue is to keep prices low, at least for the first few years, to help wipe out the illegal competition.

She says the higher the legal prices, the more business will be left in the hands of the illegal market.

• Canadian cannabis producers set their sights on global domination
• ANALYSIS| Tax policy on legal pot must squeeze out criminal competition

But the University of Waterloo's Anindya Sen says that all may be moot, because until the industry expands to fill the gap, his estimates show legal growers will only be able to satisfy about 60 per cent of demand, leaving a large share of business outside the reach of government taxes of all kinds. 

"The point that I think all governments are missing is that in the first two years there's simply not going to be enough legal supply," he says.

Despite a government rush to issue growing licences, the complexity of producing good marijuana means many new entrants will likely fail, he says.

But even that process will produce tax revenue. The rush to get into the booming legal marijuana industry, even if some businesses don't succeed, will put more revenue into the pockets of Canadian governments at all levels.

Follow Don on Twitter @don_pittis

More analysis from Don Pittis