How much legal cannabis could raise in tax revenue - and why it might fail

A new report shows a legalised cannabis market could raise $490 million in taxes each year - but only if it's good enough to wipe out the black market.

And with the Government hoping to design it in a way that discourages use over time, the New Zealand Institute of Economic Research (NZIER) fears it might not be. 

It's released a new report into how the proposed legal cannabis system proposed by the Government might work. The findings are based on a similar report the group did a few years ago, but updated with new evidence collected from places where it's been legalised recently, such as Canada and parts of the United States. 

"The evidence from America is you can wipe out the black market if you have an open, regulated regime that allows customers to get access to the product they want and allows low-cost production," principal economist Peter Wilson told Newshub.

"But the Government seems to be saying it doesn't want that to happen - it doesn't want a commercial market. It wants to see use reduced through time."

The Government's proposed scheme would see cannabis tightly restricted, with limits on potency and amounts any individual can possess at any one time. It would also be taxed - NZIER saying this could bring in $490 million. 

"That is dependent on the legal market taking over from the illegal market, and we think the Government's got to do a bit more work to do to make sure that happens. We hope there will be some more consultation and discussion before the legislation is passed."

The fear is if the legal regime is too expensive or difficult to access, users will simply keep turn back to the black market.

Wilson says the Government's desire to prevent a commercial market developing might result in this happening, particularly if the goal of reducing usage is pursued too heavily. This would also see revenue drop, as black market sales obviously aren't taxed.

"We just think the idea of reducing through time is something that could have unintended consequences, and we might not get the benefits of legalisation that some people are thinking... But remember, we've already got an illegal market that's not going to go away if we don't legalise. You need to think about, do we want safe and regulated cannabis versus the current approach of probably unsafe and illegal cannabis." 

The report notes in Uruguay while regulated cannabis prices are low, its regime requires sales to be made at pharmacies - and few pharmacists have taken it up, so the "illicit market has continued to supply most users".

In California, high regulation costs have seen few illicit growers go above-board, while in Colorado, the black market appears to have "been absorbed" into the legal market, and use amongst teens has dropped because it's hard for them to obtain the drug from legal stores.

The country will vote whether to legalise cannabis on September 19, if the election goes ahead. Prime Minister Jacinda Ardern has said there are no plans to delay it at this stage, despite the COVID-19 pandemic. Asked if this was a good time to be firing up the cannabis debate, Wilson said Kiwis "can probably think about more than one thing at once", and the Government would need time to make any adjustments to its proposed regime before the referendum. 

"The Government is still planning to have a referendum on this on the 19th of September this year... This is something that Kiwis, we think, should be concentrating on."

The full report can be read on the NZIER website.