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Legalizing pot: How should Canada tax it, and by how much?

A fully budded marijuana plant ready for trimming is seen at the Botanacare marijuana store ahead of their grand opening on New Year's day in Northglenn, Colorado December 31, 2013. REUTERS/Rick Wilking

© Rick Wilking / Reuters

When the state of Colorado legalized marijuana for recreational use in 2013, it soon realized estimates of how many people consume the plant had badly undershot the mark. But if demand was higher than expected, then at least tax revenues beat expectations, right? Surprisingly, no.

The sample size of countries and states that have legalized cannabis is small. But there are still reams of research for Canada to analyze when it comes to a central issue in pot policy: taxation. For example, slapping an excise tax on pot in the way Canadian governments do on booze, and making it subject to sales tax, will raise the price. All else equal that's a good thing, given that the goal of pot legalization is not to increase pot consumption. But high legal prices may carry their own negative consequences.

Black-market dealers, who control the long-illegal trade, could undercut a too-high legal price. It's a tricky balance. When alcohol prohibition was repealed, taxes were purposely kept low to crowd out organized crime, and that has mostly worked.

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Washington state's excise levy is 25 per cent at the production, wholesale, and retail stages. At first, that raised pot prices. But as legal, industrial pot production has ramped up, retail pot prices have started to fall. Meanwhile in Colorado, the state is taking in less in pot taxes than expected, apparently because many users are still buying in the black market.

All of which raises other questions. Should levies be indexed? Should excise taxes be by volume or sale price? Should tax levels be graduated based on drug potency?

If legal pot is cheap, then there won't likely be much black-market pot. But cheap, legal pot will also encourage consumption, particularly among young people whose brains may be more vulnerable to high-potency weed. The point of sin taxes is to curb use. And legalizing marijuana, like ending alcohol Prohibition, is not about encouraging more people to become regular users.

Another wrinkle: marijuana is also used for therapeutic purposes. Should medical pot be treated differently than recreational bud? Or will that lead to a spike in prescriptions?

On balance, legalization is better than prohibition. But it's also a lot more complicated.

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