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.


Just Posted

Northwestel says it is investigating into the cause of the total communications blackout throughout the territory after a power failure in Whitehorse on Wednesday night.
Internet outage prompts criticism on Dempster fibre project delays

The Liberals responded that they have proceeded cautiously to avoid high costs.

A motorcycle with driver pulled over on the right side of the North Klondike Highway whose speed was locked in at 171 kilometres per hour. (Courtesy/Yukon RCMP)
Patrols of Yukon highways find poorly-secured loads, intoxicated drivers

The ongoing patrols which police call ‘Operation Cooridor’ is mainly focused on commercial vehicles.

Awaken Festival organizers Meredith Pritchard, Colin Wolf, Martin Nishikawa inside the Old Firehall in Whitehorse on May 11. (Haley Ritchie/Yukon News)
Performing arts fest plans to awaken artistic talent in Whitehorse and the rural North

‘A value of ours is to make theatre as accessible as possible.’

April Mikkelsen tosses a disc during a ladies only disc golf tournament at Solstice DiscGolfPark on May 8. John Tonin/Yukon News
Yukon sees its first-ever women’s disc golf tournament

The Professional Disc Golf Assocation had a global women’s event last weekend. In the Yukon, a women’s only tournament was held for the first time ever.

Dave Blottner, executive director at the Whitehorse Food Bank, said the food bank upped its services because of the pandemic. (John Tonin/Yukon News)
Food Bank sees Yukoners’ generosity firsthand

“Businesses didn’t know if they could stay open but they were calling us to make sure we were able to stay open.”

More than 25,000 people have received the firsdt dose of the vaccine, according to the Yukon government. (Black Press file)
Yukon has now vaccinated 76 per cent of eligible adults

The territory has surpassed its goal of 75 per cent as a first step toward ‘herd immunity’

A prescribed burn is seen from the lookout at Range Road and Whistle Bend Way in Whitehorse May 12. (Stephanie Waddell/Yukon News)
Editorial: Are you ready for a forest fire?

Citizens for a Firesmart Whitehorse have listed some steps for Yukoners to boost safety and awareness

Caribou pass through the Dempster Highway area in their annual migration. A recent decision by the privacy commissioner has recommended the release of some caribou collar re-location data. (Justin Kennedy/Yukon News)
Privacy commissioner recommends release of caribou location data

Department of Environment says consultation with its partners needed before it will consider release

Chief Medical Officer of Health Dr. Brendan Hanley. (Crystal Schick/Yukon News)
Family pleased youth will be able to get Pfizer vaccine

Angela Drainville, mother of two, is anxious for a rollout plan to come forward

Safe at home office in Whitehorse on May 10, 2021. (John Tonin/Yukon News)
Federal government provides $1.6 million for Yukon anti-homelessness work

Projects including five mobile homes for small communities received funding.

Drilling at Northern Tiger’s 3Ace gold project in 2011. Randi Newton argues that mining in the territory can be reshaped. (Yukon government/file)
Editorial: There’s momentum for mining reform

CPAWS’ Randi Newton argues that the territory’s mining legislations need a substantial overhaul

At its May 10 meeting, Whitehorse city council approved the subdivision for the Kwanlin Dün First Nation’s business park planned in Marwell. (Submitted)
KDFN business park subdivision approved

Will mean more commercial industrial land available in Whitehorse

Most Read