Can Legal Cannabis Relieve Fiscal Deficits? These Economists Say ‘Not Necessarily’

Legalizing marijuana is often cited as a way to mitigate fiscal deficits for states and countries.

But after looking at data from the Canadian market, two bold economists dare to challenge this notion. 

While there are both social and health-related benefits of cannabis legalization, economists Ian Irvine and Miles Light warn that legalizing adult-use cannabis might not be the golden goose that many expect.

In a research paper published in Canadian Public Policy, the co-authors state that legalization comes with an inherent paradox: in order to beat black market prices, jurisdictions are forced to bring down taxes. In some cases, this can turn legalization into an unfruitful endeavor from a tax revenue perspective.

As legal cannabis eats away at the market share of other commodities like tobacco and alcohol, jurisdictions that place high taxes on these products can actually experience a drop in overall tax revenue, after legalization occurs.

“You can’t have a huge legal market and have huge legal tax revenues, because that would require a high rate of taxation on each unit of cannabis,” Irvine said. 

Irvine, who is a professor of economics at Concordia University, co-wrote the paper with Light, who is a research economist at the University of Colorado.

They believe legal cannabis can bring a valuable source of revenue for jurisdictions, not in the form of a sales tax, but from personal and corporate income taxes paid by industry workers and firms, as they become integrated into the legal space.

Unintended Consequences

Irvine and Light studied the legal adult-use cannabis market in Canada hoping to find valuable insights for jurisdictions contemplating legalization.

Tax revenue arising from legal adult-use cannabis is subject to two variables, they said. First is the ability of the legal market to defeat the illicit market.

In a reductive interpretation, this event alone would be translated into an automatic rise in tax revenue. Every gram of cannabis that is legally sold accounts for a new penny in tax revenue that would otherwise be diluted in the unregulated …

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