Commentary

How Private Sector Stores Would Keep Pot Prices Low Enough to Kill Black Market

The Medicine Man of Glenwood Springs store is a medical marijuana dispensary in Colorado. (Image: River North Photography/iStock)

New Brunswick’s government recently announced that NB Liquor will oversee the sale of recreational marijuana in the province when legalization comes into effect next year.

At the press conference where this announcement was made, NB Liquor CEO Brian Harriman said that the Crown Corporation’s goals were break-even profit-wise while keeping marijuana out of the hands of children and undercutting the black market, stating “with a regulated controlled market, the size of the illicit market is going to shrink.”

However, if marijuana is regulated, taxed, and sold in much the same way as alcohol currently is, the province risks less-than-anticipated tax revenue, denial of greater employment opportunities and entrepreneurship, and, in contrast to the Corporation’s and government’s hopes, the continued presence of a black market in marijuana.

RELATED: Province Says NB Liquor Will Operate Recreational Marijuana Stores

That is what happened in WashingtonColorado and Nevada. These three states place a total tax burden on legal marijuana sales of more than 30 percent, and these states have all struggled to reduce let alone eliminate illegal marijuana sales.

Cumbersome licences and regulation coupled with high taxes make legal pot uncompetitive. In Colorado, for instance, an ounce of legal weed costs about $240, compared to as little as $180 on the black market. Even if stoned, consumers know which is the better deal.

Colorado has useful experience with tobacco. As of January, Colorado taxed cigarettes at $0.84 for a pack, compared to $4.35 in New York.  In Colorado, 13.5 percent of all cigarette sales go through the black market, while in New York the figure is 58 percent.  The same dynamic is bound to happen in Canada with marijuana, just as it has with tobacco.

A 2017 analysis by Rosalie Wyonch at the C.D. Howe Institute estimated how heavily taxing marijuana sales in Canada could feed the black market. Her calculations found that if only the existing HST is charged on marijuana sales, more than 90 percent of marijuana sales would be legal with government revenue of $675-million nationwide.

If the federal and provincial governments tried to raise $1-billion in new taxes,  Wyonch estimated that only half of the market would be regulated. Any further tax increases would only drive more business toward the black market with little or no additional revenue.

Governments eager to reap huge windfalls through excessive taxes from marijuana will only see diminishing returns as tax rates go up and consumers flock to the black market. That won’t address public concerns about health or about youth access to marijuana, which is the now cited as the primary justification for a government-run monopoly on marijuana sales.

The proposed NB Liquor-run approach will almost certainly result in excessive tax rates (in part to fund the inflated public sector wages of its’ retail employees) that will depress potential public revenues and encourage black market activity.

In other words, the option favoured by governments across Canada is the wrong policy choice. New Brunswick should let the private sector sell marijuana, regulated by the provincial government.  There is no reason to add additional taxes beyond those that normally apply to consumer products.

Regulation, licensing, and compliance auditing need not be heavy-handed either as this will only discourage suppliers from entering the legal market. Competitive pricing, a steady supply, and reliable product quality will help to keep prices competitive, which in turn will undermine the illicit marijuana trade.

Patrick Webber is a Research Associate at the Atlantic Institute for Market Studies.

Huddle publishes commentaries from groups and individuals on important business issues facing the Maritimes. These commentaries do not necessarily reflect the opinion of Huddle.