CANNABIS SPECIAL: The economics of weed in the Yukon

YG shows up in several places, since it will be both a seller, a regulator and a tax collector

Economists expect the legalization of cannabis to boost Canada’s gross domestic product figures by up to $10 billion.

That may sound like a big number, but it’s just a sliver of the nation’s $2-trillion economy. And we should be careful of thinking of this as “growth,” since much of the boost is simply the recognition of an economic activity that was already happening but wasn’t in official statistics since it was illegal.

There has been lots of debate about how big the total market for recreational marijuana will be. Ottawa’s Parliamentary Budget Officer (PBO) estimated that by 2021 there will be 5.2 million Canadians who use marijuana at least once per year. They would consume over 700 tonnes of cannabis per year, with 98 per cent of demand coming from the 2 million people who use it daily or weekly.

Depending on assumptions about retail prices, this suggests a total market of around $5 billion for both legal and illegal cannabis. Other analysts get higher figures extrapolating from the experience of U.S. states that have already legalized, sometimes reaching $10 billion or more.

To put that in context, the market for beer is about $9 billion.

Scaling the estimates above for the Yukon’s population size, we would get around 5,000 Yukoners using 700 kilograms of cannabis in a given year, 2,000 using it daily or weekly, and a total Yukon cannabis market of $5-10 million.

Then we have to ask how this money gets spread along what consultants call the “value chain,” and how much of it will stay in the Yukon. The stages of the value chain include equipment manufacturing, cultivation, processing, testing and regulation as well as marketing and sales. Along the way, money flows to businesses, workers and governments in and outside the Yukon.

The Yukon government shows up in several places, since it will be both a business selling the product, a regulator and a tax collector.

The share of the money that will stay in the Yukon may be smaller than cannabis enthusiasts hoped, due to some circumstances beyond our control as well as some choices made by the Yukon government.

The first limiting factor is that edibles and cannabis-infused drinks will not be immediately part of the legal market. This is unlike Alaska, where, for example, edibles were immediately available.

Drinks are also a hot topic in the global beverage industry, since the big global beverage firms are thinking about how to respond to the threat of weed to their traditional products. Eventually, expansion into these products would increase total revenue for the industry and taxes for the government.

The production stages of the value chain will also be limited in the Yukon. The Yukon government store will not be selling any Yukon-produced marijuana when it opens. This is also unlike Alaska, and more like the old days when beer and liquor were 100 per cent imported with no local jobs or profits at places like Yukon Brewing. Our Alaskan friends have created a whole eco-system, including jobs in testing and regulation, as well as export opportunities.

The PBO estimates 60 per cent of the value is in the production stages of the value chain, and that portion of the money will flow Outside.

If you think of cannabis as an agricultural product, it is one of the few that could be viable in the North. Its high value per gram gives more cover for higher energy or labour costs in the North compared to commodities such as potatoes.

Yukon producers may be allowed into the mix in the future, however.

The next step is sales and marketing. We will have the jobs in the Yukon government store and mail order operation. The PBO estimates that the retailing stage’s wages, profits and other costs will add up to around $3 per gram. That’s an average, and the actual profits (or losses) of the Yukon government’s retailing unit will depend on how efficiently they run it and how much of the market switches from black market or medical marijuana.

The government says it plans to eventually allow private retailing, but remember this still has not happened for beer and wine except in limited off-sales outlets.

On the tax side, the corporate income tax will accrue only to the provinces since no Yukon private companies are involved along the value chain. The same applies for personal income tax on cannabis entrepreneurs, although the employees of the government store will pay. The Yukon will get 75 per cent of the marijuana tax.

The federal-provincial-territorial weed deal says taxes will be the higher of $1 per gram or 10 per cent of the selling price, and if the federal take from their 25 per cent share hits $100 million then everything over that will go to the provinces and territories.

If Yukoners consume 700 kilograms of weed per year, the Yukon’s 75 per cent share of a $1 per gram tax would work out to $525,000 in annual tax revenues. However, the PBO points out that when Colorado legalized cannabis there remained a large black market representing about half of the market, as well as a significant share of sales through medical marijuana channels.

This mix depends on how retail prices compare to black market prices, as well as the quality and convenience of the store. But you can expect the Yukon’s actual weed tax take to be significantly lower than $525,000.

We don’t have a territorial sales tax, unlike the provinces. The provinces will therefore make more money per gram than the Yukon government. PBO estimates total federal and provincial sales taxes at about $600 million, 60 percent of which would go to the provinces. Again, scaling to the Yukon’s population, that means about $360,000 will stay in the wallets of Yukon cannabis users compared to if they lived in a sales-tax province.

Then there’s the question of whether cannabis will be a substitute for alcohol or a complement. Some stock market analysts think Canadians will drink less alcohol once they have access to legal weed. If this is the case, it will eat into the profits of the Yukon government’s liquor stores, which have been a dependable and lucrative cash cow for decades.

So what is the net economic effect of legalization in the Yukon?

In the longer term, the Yukon’s benefits will depend on three key questions. Will it tightly manage the costs of the government store so it doesn’t eat up too much of the revenues? Will the government store have a dynamic retailing strategy that will steal market share from the black market? And when will the Yukon private sector be allowed to get into business?

In the meantime, there will be limited economic development opportunities, at least at first. The Yukon private sector will not be involved in production, distribution or sales. There will be no export business. New government jobs will be created in retailing, but we don’t yet know if this will turn out to be a profit-centre or a cost-centre for the Yukon government. The Yukon government will receive cannabis tax revenues, but probably less than even half a million dollars; not much compared to our billion-dollar transfer payment.

Legalization is exciting news for cannabis consumers in the Yukon. Advocates have foreseen big benefits around improved quality, product safety and shrinking the black market. But the numbers above suggest the cannabis legalization may be an economic development buzz-kill.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

Yukonomist

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