Legalized Cannabis Fiscal Considerations Office of the Parliamentary Budget Officer 1 November 2016 1

Why this Study? In Spring 2017, the federal government intends to introduce legislation to legalize and regulate recreational cannabis in Canada The legalization of recreational cannabis will introduce an entirely new sector into the formal economy Legalization will create new government revenues and expenses PBO’s mandate includes analyzing trends in the Canadian economy 2 of 12

Users and Consumption (Middle Projection, 2018) In 2018, estimated 4.6 million annual users, 655 mT consumed Vast majority of total demand from frequent users 3 of 12

Illicit Cannabis Price (Estimated Average, 2015-16) Prices vary considerably across the country 4 of 12

Illicit Cannabis Price (Estimated Average, 2015-16) 5 of 12

Illicit Cannabis Price (Estimated Average, 2015-16) Mid-point average estimate of $8.84 per gram in 2015-16 Legalization will likely put downward pressure on illicit cannabis prices 6 of 12

Legal Cannabis Price (Projection, 2018 & 2021) Mid-point, pre-tax average estimate of $7.50 per gram in 2018 Initially, prices may be higher due to the potential for supply shortages, regulatory changes, and tax policy Over the long-term, there will be downward pressure on wholesale prices as production costs decline However, long-term prices are less predictable as consumer tastes and product offerings evolve 7 of 12

Legal vs. Illicit Price (Projection, 2018) Excise taxes would push the after-tax legal price above the illicit price observed in 2015-16 8 of 12

Resident Consumption (metric tons, Middle Projection, 2018) All other things being equal, higher cannabis prices (legal and illicit) are associated with lower aggregate consumption, and vice versa 9 of 12

Legal Market Share (Projection, 2018) The higher the premium for legal cannabis over the illicit price, the more Canadians will purchase cannabis on the illicit market 10 of 12

HST/GST/PST Revenues ($ millions, Middle Projection, 2018) Modest revenues at the outset of legalization Growing potential to capture fiscal revenues as market matures 11 of 12

Questions about this Report Jean-Denis Fréchette Parliamentary Budget Officer pbo-dpb@parl.gc.ca 613-992-8026 Mostafa Askari Assistant Parliamentary Budget Officer mostafa.askari@parl.gc.ca 613-992-8045 Questions about this Report Nigel Wodrich nigel.wodrich@parl.gc.ca 613-698-6568 Background Briefing Visit our website www.pbo-dpb.gc.ca and look for the report under the “our publications” tab. More Information 12 of 12