The Highs and Lows of a New Market
Economic Impacts of Legalization
2019 has been quite a year for the legal marijuana industry. In America, Illinois became the first state to legalize cannabis sales, and in Canada, it’s been legal nationwide for a year. Illinois Governor Jay Robert Pritzker welcomes the changes, but is it all upside? What’s the big picture?
In North America, cannabis looks like it’s here to stay. In Illinois, set to go live on January 1 of next year, 55 medical marijuana dispensaries are already lined up to make the switch to recreational sales. This prompted Illinois Governor Jay Robert ‘J.B.’ Pritzker – who made marijuana legalization a critical part of his election campaign – to welcome the change on social media. The Governor wrote on his official Facebook page that Illinois took “the most equity-centric approach in the nation” by legalizing cannabis for adults 21 and older, having “a transformational impact on our state, creating opportunity in the communities that need it most and giving so many a second chance.”
One of the most newsworthy stories in decades, the legalization of marijuana has presented challenges with roots going back many decades. In Canada, cannabis was banned from 1923 until it became legal for medical use in 2001. It took another 17 years, but recreational marijuana was legalized in Canada on October 17, 2018, following passing of the Cannabis Act (Bill C-45) by the House of Commons.
Benefits of legalization
Just over a year since cannabis became legal in Canada, there is still plenty of debate, from its availability to its health benefits, with one of the hottest topics being the economics of legalization. From generating taxes federally and provincially to creating new businesses and much-needed employment, everyone has an opinion on the subject.
The topic of numerous studies in North America and worldwide, one study, Australia’s Cost Benefit Analysis of Two Policy Options for Cannabis: Status Quo and Legalisation (https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0095569), revealed standard cost-benefit (excluding government revenue) did not realize “substantially more economic benefits.”
However, once government revenue was included in the equation, legalization came out on top. In the United States and Canada, one of the advantages of making recreational cannabis legal straddles both economics and law enforcement.
In North America, the costs of arresting, processing, charging, prosecuting, and incarcerating persons found guilty of marijuana-related crimes is enormous, running into billions of dollars annually. In 2016 alone, 587,700 men and women were arrested for crimes involving cannabis – more than for all murders, sexual assaults, and other violent crime combined.
But not only is enforcement costly in the short term, it often carries lifelong negative implications. For younger persons charged and convicted of marijuana possession, it can bar them from employment, and dramatically lessen their lifetime contribution in tax.
Job ups and downs
While legalization has decidedly been a job starter in Canada, it has not come without challenges. As of late August this year, Statistics Canada reported 9,200 working in the cannabis sector, a significant increase from 2,630 in the 2018 fiscal year, and 1,438 in fiscal 2017. Legalization saw massive hiring, and job creation in areas ranging from growing to processing, and from shipping to sales.
But for those employed in the industry, not all has been smooth. In June, retailer Tweed – owned by Canopy Growth Corporation, the biggest cannabis company in Canada – laid off 12 percent of its staff in Manitoba. October saw the Toronto Stock Exchange shares of CannTrust Holdings Inc. drop after it announced it was temporarily cutting up to 140 positions, while in Gatineau, HEXO Corp. laid-off 200 workers after posting a net loss of $56 million – and a $17 million write-down – for the fiscal quarter ending July 21, 2019.
With issues ranging from a sluggish roll-out, a scarcity of licensed outlets, and government red tape (especially in Ontario), to a high price point and the persistence of black market supply, the road has been bumpy. Yet this shouldn’t come as a surprise to anyone in the business. Legal marijuana is a new enterprise, and like any emerging industry, needs time for both industry and market to settle down.
Recent surveys show that just over a year after becoming legal in Canada, sales are steadily increasing. According to the latest data from Statistics Canada (National Cannabis Survey, third quarter), one of the biggest purchasing groups is seniors. While less likely to consume marijuana then their younger counterparts, persons 65 and older are more willing to purchase cannabis from legal sources than from black market suppliers.
Surprisingly, the survey also found that some 27 percent of seniors are first-time cannabis users (many for medical purposes). And while many consumers still buy from black market sources, sales from licensed producers and authorized retailers continue to rise, with over half of the Canadians surveyed stating they buy marijuana legally.
Billions in taxes
In America, the economic benefits of marijuana are being realized as more states embrace legalization, and since states like Colorado and Washington became the first (for recreational use) back in 2014, there is much more data available.
In 2015 alone, Colorado realized over $135 million in taxes and fees from medical and recreational cannabis. This year, the state announced that it has garnered over one billion dollars in tax revenue in the past five years, with total sales exceeding $6.5 billion. With the industry fast approaching 3,000 licensed marijuana businesses, cannabis also benefits employment, with over 41,000 in the industry.
Taxes collected from marijuana are used to fund local and state job-creation programs, youth projects, mental health initiatives and more. In terms of jobs, research suggests legalization for the entire U.S. could result in 1.1 million jobs in the next five years, in areas including farming, distribution, sales, and secondary sectors like high-tech and construction.
Back in 2013 it was estimated that, in Canada, legal marijuana would bring in an additional $4 billion in tax revenue. Today, tax revenue is $8 billion and growing, according to the Toronto-Dominion Bank.
In addition, other sectors are poised to benefit, such as ‘cannabis tourism’ to Canada and real estate – the more legal sales outlets there are for marijuana, the greater the demand for premises for warehousing and outlets.
While legal recreational marijuana is still in its infancy, especially in Canada, the positive benefits from taxes and job creation will continue to grow.