This article was written by Michael Armstrong, Associate Professor of Operations Research, and was originally published in The Conversation.
October 17 marks the fourth anniversary of Canada’s recreational drug legalization. When the Cannabis Act was passed in 2018, Canada became the second country in the world to legalize the purchase, possession and non-medical use of cannabis by adults.
Now, four years later, the federal government is reviewing the law to see if it meets Canadian needs. Morris Rosenberg, the former deputy minister of law, will chair the expert panel on the project.
Also, the Ontario Cannabis Shop has announced a “full review” of its pricing. Other provincial and federal governments should follow these examples and start looking to improve their drug laws.
Rapid growth of the industry
In Canada’s first month with legalized recreational drugs, there were only about 100 licensed shops and sales of just $42 million.
But the business grew quickly — even though the pandemic didn’t slow it down — and now has more than 3,300 licensed Canadian stores. Legal cannabis products are more available than ever.
Legal products will be more competitive with legal ones due to a 25 percent drop in dry drug prices starting in 2018. In some states, they now start at $3.57 per gram and up to taxes. The improvement in the quality of the drug product has made those products more competitive with the legal ones.
As a result, monthly recreational drug sales reached $395 million in July, more than half of Canadian beer sales.
However, not everything is good for the industry. Producers have lost their profits because of too many products. Meanwhile, stores in some areas, such as Toronto and Manitoba, have too many competitors.
After little information about the health effects of marijuana for years, evidence is starting to emerge. A recent study found an increase in drug clinics among young children – all the more reason to review drug laws.
Government review is about things that are within its jurisdiction, such as manufacturers, products and amnesties. As governments regulate sales and consumption, it is important that they review their laws.
Cannabis taxes are different
In addition to health-related issues, states should also look at their drug laws for taxation. Cannabis excise taxes in Ontario in 2021-22 reached $215 million, twice the previous year. Revenue from its Ontario-based Cannabis dealer doubled to $184 million. I think Ontario also collected $121 million in sales tax, and added drug tax revenue of $520 million.
That means the provincial government received about 30 cents of every dollar residents spent on legal recreational drugs last year. The Ontario Cannabis Shop spent six cents on operating expenses.
In my comparison, I think the government collected eight cents in taxes. That left 20 cents for retailers and 36 cents for manufacturers. Some of those businesses were subject to government licenses, property taxes and income taxes.
Or consider Alberta, which often brags about its zero sales tax but doesn’t mention its hefty 16.8 percent cannabis tax. That additional cost may account for $74 million of the $164 million Alberta collected in drug taxes last year.
Governments really need money from somewhere. But is it fair to take more from consumers in ways that ignore the company’s low profitability?
Provinces should also review the management of their drug industry, including maintaining their wholesale industry. The Cannabis Shop of Ontario, for example, collects a wholesale markup of 31 per cent — even on non-affiliated sales, when growers sell directly to stores — and just 10 per cent to cover its operating costs.
And based on individual actions, the centers will remain intact. When a computer crisis in Ontario and a strike in British Columbia temporarily halted shipments from drug agencies last summer, retailers lost money because their products ran out. Why not ship products directly from producers to retailers, like Saskatchewan?
The second issue is whether local drug agencies have large stores. Quebec’s profitable cannabis industry has just 38 per cent, compared to Ontario’s Cannabis Store which has 74 per cent. But with fewer stores per capita than other states, its legal sales per capita are the lowest. That left the market open to illegal buyers.
Finally, governments should consider relaxing laws to help traders, without compromising public policy. For example, Alberta recently removed its requirement for stores to cover their windows. Clear glass can keep stores safe for workers inside, and provide a safe walkway for pedestrians outside.
The store locations are the most important
Traffic density is another important consideration. As a matter of fact, some areas in Ontario have too many stores. This classification occurred because the government banned the license for one year. The government should make it easier for drug companies to move to areas where they are not, thus reducing the hyperconcentration of the trade.
However, some rural areas have too few customers to support independent stores. Newfoundland operates by allowing general stores to sell drugs. Other states may consider doing the same.
Some cities, such as Mississauga, Ontario and Richmond, BC, do not have legal shops because provincial governments allow local councils to issue them. While it may be a smart political move for states to allow councils to publish, it may not be a smart policy move.
Learning from experience
As one of the few countries to legalize the recreational drug, Canada has set an example for others to follow. A growing number of places, including Thailand, Malta, South Africa, Mexico and Germany, are working to implement national accreditation.
Even the US federal government has recently taken steps to reform its anti-drug laws. In the US, some states have passed laws that legalize drug sales, but remain illegal at the federal level.
These countries can learn a lot from Canada’s four years. But Canada’s provincial and federal governments should learn from that experience by reviewing their laws.