Will high sin taxes endanger your community? UW professor of economics says, “The government is not on the right path right now”

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Director of the Masters of Public Service program and UW economics Professor Anindya Sen, believes that the proposed tax on marijuana will have a negative effect on communities.

The government has proposed that the tax on marijuana will be 10 per cent in addition to already existing sales tax.

This will total an almost 25 per cent taxation rate per gram of marijuana.

Sen stressed that the government proposed tax would be detrimental to the economy and communities since a high tax encourages the formation of an illegal black market.

“If you think from a macro perspective, this will obviously result in a loss in tax revenue. At the community level, you might have a thriving illegal market, and with any illegal market you also have the possibility of criminal elements, gangs, and negative consequences we want to avoid,” Sen states.

These two major consequences of the proposed tax was what the marijuana platform was built to prevent in the first place.

The federal Liberal party’s platform states, “To ensure that we keep marijuana out of the hands of children, and the profits out of the hands of criminals, we will legalize, regulate, and restrict access to marijuana.”

But with Sen’s projections, the government is approaching the matter in an ineffective way that does not accomplish any of its proposed goals except that people can now walk into an LCBO and legally purchase recreational marijuana.

It will not, as opposed to what the Liberals say, keep marijuana off the streets nor return profit to the economy.

A high tax will drive consumers away from government-approved retailers for a cheaper, more affordable option in the black market.

Along with Rosalie Wyonch, UW masters of economics alumni and current analyst at the C.D. Howe Institute, Sen used economic models to calculate the demand of legal sales and illegal sales of marijuana as the tax increased.

With those calculations, they estimate that a 10 per cent tax overall, instead of the 10 per cent additional tax, will result in a 90 per cent legitimate market.

The negative effects of sin tax have been observed before.

Taking from Sen’s previous work on taxes and smuggling in regards to cigarettes, high sin taxes on cigarettes have had detrimental effects on Ontario’s economy, with $816 million to $900 million lost in revenue to black markets.

The cigarette tax in Ontario currently adds up to almost 65 per cent per carton and this number resulted in 25 per cent of this market being illegitimate.

It should be noted, however, that Québec has successfully implemented special enforcement policies that has kept their black market to a minimum while still keeping the high sin tax on cigarettes.

“The government is not on the right path right now.” Sen also expresses concern around the method of distribution the government proposes with the LCBO being the only authorized centre of distribution.

“Essentially, the LCBO is government owned, so the government will be spending money, taxpayer money, to distribute marijuana,” Sen said. “Why can’t we just let private entrepreneurs do that?”

Not only is the government spending excess money in regulating the distribution of the substance, they are also limiting access.

The placement of LCBOs is scarce and spread out which further restricts  access and leads to further incentive for a black market, no matter how well designed the system is.

Sen estimates that in the future, the marijuana industry can bring employment and revenue to the government as long as the government plans and coordinates its distribution plan well.

The road to legalization is full of potential, and Canada has the possibility of being a major global player in the international trade of marijuana.

Unfortunately, according to one UW professor, the path the Canadian government has decided to take leads back to where we started.