David Clement is the North American Affairs Manager at the Consumer Choice Center.

Much has been said about Canada’s roll-out of legal cannabis. The system thus far has been riddled with hiccups, supply shortages, prohibition-style penalties and significant limitations on consumer access. All of that aside, one of the most glaring issues with Canada’s cannabis framework is the way in which it is taxed, specifically, the excise taxes that are applied to medical and recreational cannabis.

Currently, both have a 10-per-cent excise tax, or $1 a gram, whichever is higher. The first major problem with the tax amount is that it is applied to medical cannabis, meaning patients are paying sin taxes on their prescribed medicine. Deliberately making medicine more expensive is disastrous public policy and categorically unfair.

On the recreational side, the excise tax has the immediate effect of inflating the price of legal cannabis. For recreational consumers, legal cannabis has federal and provincial sales taxes (upward of 15 per cent in some provinces), the 10-per-cent excise tax and local boutique taxes such as Manitoba’s 6-per-cent social responsibility tax. It becomes increasingly harder for the legal market to crowd out the black market when consumers in some provinces face a tax rate of 29 per cent. To achieve the goal of beating the black market, the legal market has to be able to compete with black market prices. Adding 29 per cent to a consumer’s bill certainly isn’t going to help in that regard.

The Trudeau government’s most recent budget did address the issue of cannabis excise taxes. Unfortunately, it didn’t reduce the excise tax on recreational cannabis, or remove it from medical cannabis. Instead, it announced that edible cannabis will be taxed based on its THC potency, at a rate of $0.01 per milligram of total THC in the product. This is yet another blow for medical patients. New research on cancer patients who use cannabis shows that they prefer oils and extracts, as opposed to dried cannabis, and that the most effective for relief are products with high THC potency. The new taxation for edibles, extracts and oils directly targets these patients, and makes their preferred form of medicine more expensive. Medical cannabis shouldn’t be taxed, but if it is, it certainly shouldn’t be taxed for potency.

In addition to the effect the excise tax has on recreational affordability and medical treatment, the system also causes logistical problems. As noted from a variety of licensed producers, the excise tax sticker process has led to numerous headaches. Producers have reported that some excise stickers weren’t adhesive, while others noted that sizing wasn’t appropriate. In addition, the simple process of automating the stamping of products has been complicated. U.S. companies that make the machinery to automate the process have been reluctant to sell to Canadian companies because they fear their own governments will reprimand them for entering the cannabis market. These issues inflate costs, which are then shouldered by consumers and patients, and limit access.

Excise tax stickers are certainly a pain for licensed producers, but a much larger and significant problem is how the stickers are administered, and the consequences on legal sale. The producers pay excise tax when the products they package are delivered to the point of sale (a licensed retailer). From that point on, the product bears the excise tax stamp of whatever province the retailer is in, and cannot be sold in other provinces. This means the legal recreational market will continue to struggle with fluctuations in demand, because once a product is available in one province, it can’t be sold anywhere else.

For example, if the government retailer in Nova Scotia wanted to buy excess product from the Ontario Cannabis Store to help meet consumer demand, it could not because of excise stamps. The same goes for private retailers. An owner of a private outlet in Alberta could not move excess product to a storefront in Manitoba, even if the same person owned both stores. In fact, Alberta takes this insanity one step further and prohibits the movement of products between stores within the province. The issue of landlocking legal product means the market can’t correct for misallocations, and that retailers, whether government or private, can’t properly react to shifts in consumer preferences. Excise taxes make cannabis more expensive, but they now make it less available, which is a double-whammy in favour of the black market.

Cannabis legalization is catching fire throughout the United States, emerging in Europe, and even taking hold in South America and Africa. Canada could be a global player in the internationalization of cannabis, but that is only possible if the industry and Canada’s domestic market aren’t being forced to function with their hands behind their back. Excise taxes and the way they are implemented are creating immense hurdles, all of which disadvantage recreational consumers, the domestic industry and medical patients, and prevent Canada from flourishing in the emerging global cannabis space.

Originally published here



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